**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

**(Mark One)**

**ý****                                ****Annual Report Pursuant to Section13 or 15(d) of the Securities Exchange Act of 1934.**

 

**For the Fiscal Year Ended: December 31, 2004**

 

**or**

 

o                                  **TransitionReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.**

 

**For the transition period from                              to                              **

 

**Commission File Number: 0-27280**

 

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** **

**META Group, Inc.**

(Exact name of registrantas specified in its charter)

 
| **Delaware**                                                     | ** ** | **06-0971675**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                             |       |                                  |
| **208  Harbor Drive, Stamford, Connecticut**                     | ** ** | **06912-0061**                        |
| (Address of principal  executive offices)                        |       | (Zip Code)                            |

** **

Registrant’s telephonenumber, including area code: **(203) 973-6700**

 

Securities registered pursuant to Section 12(b) of the Act:  **None**

 

Securities registered pursuant to Section 12(g) of the Act:

 

**common****stock, $0.01 par value per share**

(Title of class)

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes   ý                      No    o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.   o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

 

Yes      o                      No       ý

 

The aggregate market value of the voting common stock held bynon-affiliates of the registrant was $45,705,112, computed by reference to thelast sales price of $4.15 as reported by the Nasdaq National Market System, asof the last business day of the Registrant’s most recently completed secondfiscal quarter, June 30, 2004.

 

As of June 30, 2004, 13,851,375 shares of the registrant’s commonstock, $0.01 par value per share, were outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE -**None

 

 

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*The matters discussed in this report including, butnot limited to, statements concerning completion of the Company’s proposedacquisition by Gartner, Inc.; IT spending; competitive pricing pressure;general economic conditions; anticipated revenues from internationaloperations; anticipated cost and expense levels relative to the Company’s totalrevenues; anticipated working capital and capital expenditures; cash flow andcash balances; acquisitions and potential contingent payments related thereto;goodwill; or other statements using words such as “anticipate”, “believe”, “could”,“estimate”, “expect”, “intend”, “may”, “plan”, “project”, “should” or “will”constitute forward-looking statements and are made under the safe harborprovisions of the Private Securities Litigation Reform Act of 1995. The Company’sactual results of operations and financial condition have varied in the pastand may in the future vary significantly from those stated in anyforward-looking statements.  Factors thatmay cause such differences include, without limitation, failure to satisfyclosing conditions contained in the Agreement and Plan of Merger betweenGartner, Inc. and META Group, Inc. dated December 26, 2004,  as well as the risks, uncertainties, and otherinformation discussed within this Form 10-K (and in the documents incorporatedby reference into this Form 10-K). For a discussion of these risk factors, see “Management’sDiscussion and Analysis of Financial Condition and Results of Operations – RiskFactors”.*

 

**PART I**

 

**ITEM 1.****          BUSINESS**

 

# **GENERAL**

# ** **

META Group, Inc., a Delaware corporation founded in1989 (“META Group,” together with its subsidiaries— collectively the “Company”),is a leading provider of informationtechnology (“IT”) research, advisory services, and strategic consulting. TheCompany’s goal is to help clients be more efficient, effective, and timely intheir use of IT to achieve their business goals.

 

IT user organizations utilize the Company’s research,analysis, and recommendations to develop and employ cost-effective andrevenue-enhancing strategies for selecting and implementing timely ITsolutions, and for aligning these solutions with business priorities. ITvendors use the Company’s services for help in product positioning, marketing,and market planning, as well as for internal IT decision making.

 

The Company offers clients annual subscriptions tofifteen different research services (“Advisory Services”), three data services(“Data Services”) and five structured transformation programs (“Infusionprograms”). These offerings are focused on specific areas of informationtechnology, the special needs of the CIO and others within the IT organization,or the distinct IT/business issues of specific industry markets and the publicsector. Recommendations to clients are based on research conducted by METAGroup analysts and consultants, projections and analyses of important industrytrends, experiences of other companies, key technology and business bestpractices, and the impact of new technologies, products, and services.

 

In addition, the Company offers various targetedpublications as part of its Published Research Products family, as well asvarious newsletters and research subscriptions 

 

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delivered via its website,www.metagroup.com.

 

The Company also offers strategic consulting servicesthrough its consulting division, META Group Consulting (“Strategic Consulting”).A significant portion of Strategic Consulting clients are also AdvisoryServices subscribers.

 

The Company targets as its clientssubstantial commercial and governmental users of IT, as well as IT vendors. Asof December 31, 2004, the Company had subscribers in approximately 2,600 clientorganizations worldwide.

 

Specific comparativefinancial information may be found in “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and in the consolidatedfinancial statements.

 

META GROUPâis a registered trademark of the Company. The META GROUP logoä,METAä, META DELTASä,META FAXä, META FLASHäand META TRENDSä are trademarks of the Company. METAspectrumsmis a service mark of the Company.

 

On December 26, 2004, META Group entered into adefinitive agreement (the “Agreement”) for Gartner, Inc. (“Gartner”) to acquireMETA Group (the “Merger”). Under the terms of the Agreement, META Group stockholderswill receive $10.00, without interest, in cash for each share of META Group commonstock held by them.  The Merger isexpected to become effective in the second calendar quarter of 2005. The Mergeris subject to regulatory review, approval by META Group stockholders andcertain other customary conditions.

 

# **WEBSITE ACCESS TO OUR PERIODIC SEC REPORTS**

# ** **

           Our primary internet address iswww.metagroup.com. We make our periodic SEC Reports (Form 10-Q and Form 10-K)and current reports (Form 8-K) available free of charge through our website onthe same business day as they are filed electronically with the SEC.  The specific location on the Company’swebsite where these reports can be found ishttp://domino.metagroup.com/PressHome.nsf/web/investors.

 

# **INDUSTRY BACKGROUND**

# ** **

Businesses and other organizations remain dependent onIT for competitive success, which has led to historical growth in IT-relatedexpenditures (despite a recent decrease due to general economic conditions).The IT market is being driven by many factors, including intensified domesticand global competition, internet technologies and e-business, the acceleratingpace of technological change, shortened product and business planning lifecycles, outsourcing, and widespread corporate downsizing.

 

At the same time, the decision-making process involvedin the planning, selection, and implementation of IT solutions is growing morecomplex. IT decision makers must evaluate various new and rapidly evolvingtechnologies and products from multiple vendors and consider the compatibilityof these products with one another and with existing legacy systems. In 

 

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addition, as IT assumes a morebusiness-critical role, senior executives of organizations are compelled totake a more active role in IT planning and decision-making – often being calledon to be strategic drivers of business and technology innovation.

 

Because of these trends,there is an increasing need for a level of IT guidance that often cannot beeffectively supported by the internal resources of a single organization.Organizations frequently turn to outside sources for help with strategic andtactical advice in planning, selecting, and implementing IT. Historicallyhowever, available solutions have had significant limitations. Software andequipment vendors generally offer advice biased toward their own products orservices, while often understating compatibility issues. Many professionalservices firms and implementation companies provide technical advice, but theyhave incentives to promote solutions that require their services and often havepurchasing and cooperative relationships with particular hardware and softwarevendors. Some independent market research firms provide vendor-neutral advice,but most target technology vendors rather than the user community. Those marketresearch firms that target users typically do not offer advice over a fullrange of technology offerings and often focus only on longer-term trends withminimal practical, actionable advice. Firms that offer published research,advisory services and consulting often do so in a disconnected manner.Therefore, there is a need for objective, user-focused, broad-based, actionableand coordinated IT market research and consulting, coupled with personalizedadvice within the specific context of an organization’s business environmentand IT requirements.

 

# **THE META GROUP SOLUTION**

# ** **

The Company addresses the demand for user-focusedguidance by providing objective IT research, analysis and advice as well asstrategic consulting to help commercial and governmental users be more efficient,effective, and timely in their use of IT to achieve their business orgovernmental goals. The Company’s services are also used by IT vendors for helpin product positioning, marketing, and market planning as well as for internalIT decision making.

 

The Company’s Advisory Services assist clients inmaking more informed, timely, and cost-effective decisions in the context ofthe client’s business and technology environments. Each Advisory Service isfocused on enhancing the client’s ability to reduce and/or contain the cost ofIT, reduce risk, assess vendor business practices and strategies, evaluateproducts and technologies, negotiate with vendors, develop financialstrategies, and formulate IT architectures and strategic plans. The AdvisoryServices positions are aligned with META Group Consulting to deliver a single,integrated and actionable view of IT across service areas.

 

The Company’s research is designed to alert clients tothe sometimes subtle and unforeseen opportunities and risks inherent in complexIT business decisions. Although the Company’s research contains concreteconclusions and recommendations, a client seeking to understand the complex ITissues addressed in written research often requires further explanation andanalysis in the context of the client’s unique business environment and ITrequirements. Accordingly, all of the Company’s Advisory Services clients havedirect access to the Company’s analysts, who adapt the Company’s publishedconclusions and recommendations to the client’s specific IT environment. TheCompany’s analysts are available to clients through direct telephoneconsultations, customized on-site briefings, annual conferences, and in-depthquarterly teleconferences addressing significant current IT developments.

 

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The Company believes its proactive involvement inclients’ specific IT problem-solving situations enables it to provideactionable advice. The Company’s analysts have real-time access to a broad baseof current user experiences spanning vertical industries and relatedtechnologies. This firsthand practical knowledge is disseminated throughout theCompany at weekly meetings of the Company’s entire research staff and throughother formal and informal collaboration systems. As a result of thisinteraction and broad knowledgebase, the Company’s analysts deliver moreinformed conclusions and recommendations. The Company believes that itsinteractive approach provides significant value to senior management and IT decisionmakers by enhancing their ability to make sound, practical, and cost-effectivedecisions.

 

The Company’s objective is to leverage its reputation,comprehensive research model, knowledge base, customer relationships, anddomestic and international sales network to expand the range of clients itserves, further penetrate its existing client base, extend its product line,and broaden the scope of its services.

 

# **SERVICES AND PRODUCTS**

# ** **

The Company’s services and products are designed toallow clients to leverage META Group’s intellectual property in ways bestsuited to their needs. The services and products come in a range of interactionmodels ranging from written content to in-depth customized consulting. Theproduct lines complement each other and provide flexible access to marketassessment and analytical expertise in the following categories:

•                                          AdvisoryServices

•                                          StrategicConsulting

 

Information regarding the revenues, operating income(loss) and long-lived assets (both domestic and international) of AdvisoryServices and Strategic Consulting may be found in Note 12 to the Company’sconsolidated financial statements.

 

**Advisory Services**

 

The Company’s Advisory Services provide technology andbusiness research spanning the full spectrum of IT. Advisory Services offeradvice that clients need to help them make better and faster IT decisions. TheCompany’s Advisory Services include analyst interaction via on-site briefingsand telephone support, which complements the written deliverables describedbelow. Advisory Service offerings include industry-specific coverage (e.g.,energy, insurance, government, and professional services) and executive ITmanagement.

 

The Company believes its Advisory Services cover thesignificant IT-related issues faced by its clients. The Company’s typicalapproach to Advisory Services offers a high level of personal service with anemphasis on client/analyst interaction. The Company’s analysts respond to theunique situation of each client by applying their knowledge base of business,technology and market information, as well as user experience.

 

The following deliverables, which involve the directparticipation of the Company’s 

 

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research analysts, typically areprovided to subscribers to the Company’s Advisory Services as an integral partof such services:

 

*Client/Analyst Interaction Deliverables:*

 

•                                          Telephoneand Email Inquiries afford each subscriber the opportunity to discussspecific issues with the Company’s analysts.

 

•                                          Half-Dayand Full-Day Briefings are held at the Company’s headquarters or at clientsites and address client-specific issues.

 

•                                          DocumentReviews**provide the Company’s analysis andevaluation of clients’ strategic documents (e.g., strategic plans, architecturaldocuments, vendor proposals).

 

*Research Deliverables:*

 

•                                          METADeltas and META Practices are regularly published analytical briefs thatdeliver analysis of major events, issues, vendor strategies, products, end-usercase studies, technology trends and issues, and other pertinent matters.

 

•                                          METAGroup Trend Teleconferences are held quarterly by each service to providean in-depth analysis of the service’s META Trends (i.e., long-term projectionsof major industry issues and trends that the Company believes will impactusers, vendors, and the IT market).

 

•                                          SpecialEvent Teleconferences enable clients to participate in discussions with theCompany’s analysts and are generally held following key industry events such asmajor announcements or trade shows.

 

•                                          METAspectrumsm   Market Summaries and Reports are IT marketevaluations published periodically. METAspectrum’s focus is on the evaluationof the market, market trends and future directions and the viability andrelative leadership positions of vendors.

 

•                                          METATrends, published annually, are three- to five-year projections ofsignificant issues and developments that will affect IT users and vendors.

 

•                                          METAFlashes are periodic bulletins containing analysis of key industry eventsor announcements that the Company deems to be of extraordinary importance.

 

•                                          METAClient Advisor is a weekly e-mail sent to clients which includes summariesof recent research items and concise summaries of the Company’s weekly researchmeeting, at which industry events are reviewed and analyzed.

 

•                                          METANews Analysis provides a written analysis of current industry trends 

 

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orevents based upon interactive discussion among analyst experts.

 

•                                          METAViewsare multi-media deliverables with particular focus on key topics ofinterest to the Company’s clients.

 

The Company’s research is delivered online viawww.metagroup.com.

 

*Event Deliverables:*

 

•                                          METAGroup Conferences  address a broad range oftactical and strategic issues. METAmorphosis, the Company’s forum foraddressing industry-wide issues, is held annually at several locationsworldwide. The Company also offers vendor sponsorship for many of itsconferences around the world.

 

•                                          RegionalEvents such as Regional Briefings and Executive Sessions afford clientsopportunities to meet with analysts locally on pressing issues and challenges.

 

In addition to the traditional Advisory Services,which provide ad-hoc interaction with analysts, the Company also providesInfusion programs that provide detailed process models and proactiveinteraction with analysts and consultants designed to support structuredtransformation in the IT environment. Each Infusion program is based on programand project management disciplines providing a method to break up challengesinto manageable projects, phases, activities, and tasks. Infusion programsinclude many of the same deliverables as an Advisory Service and add thefollowing deliverables (the specific deliverables will vary, however, basedupon the level chosen by the client):

 

•                                          On-Site Kickoff is a half-day, on-site working sessionwith a META Group analyst that provides an overview of the Infusionprogram.  A program action plan isdeveloped by the client and the META Group analyst, documenting the time frame,objectives/goals, and next steps.

 

•                                          Half-DayOn-Site Coaching Sessions are spent with team members to review progressand deliverables, resolve outstanding issues, and determine next steps andassignments.

 

•                                          METAmethodsare best practice policies and procedures which help the client acceleratethe creation of key deliverables.

 

•                                          ProgramTools and Templates assist in internal communication, education, andcreation of internal client deliverables.

 

•                                          Coachingprovides an assigned analyst to each client company that works proactively withthe client to provide guidance, drive progress, and catalyze change within ITorganizations.

 

•                                          Workshopsare on-site working sessions, which include exercises for learning and applyingprogram methods and best practices. Workshops may be linked together into acustomized curriculum addressing a wide range of client issues.

 

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•                                          Assessmentsare short, targeted evaluations of the clients’ environment as compared to bestpractice methods and/or META Group developed industry benchmarks. They includea high level gap analysis and creation of an action plan for improvement.

 

•                                          InfusionUpdate Teleconferences provide clients with periodic updates on criticaldevelopments and challenges.

 

Infusion programs and the related workshops andassessments provide an important bridge between traditional Advisory Servicesthat examine broader industry issues and Strategic Consulting which drills intospecific projects for a given client.

 

Workshops and Assessments may also be purchased asstand alone products separate from an Infusion program.

 

The Company provides fifteen Advisory Services, whichare grouped into the categories of “Technology Research Services”, “ExecutiveServices” and “Industry Services,” each of which is described below.

 

# **Technology Research Services**

# ** **

In 2003, the Companycompleted a realignment of its Technology Research Services — specifically involving Application DeliveryStrategies, Web & Collaboration Strategies, Electronic Business Strategies,Global Networking Strategies, Service Management Strategies, ServerInfrastructure Strategies, and Enterprise Data Center Strategies. The changewas made to better align the Company’s services to the targetconstituencies inside client IT departments and group topics to more directlyaddress the needs of clients.

 

Clients who currently subscribe to any of the above services will betransitioned into the appropriate combination of the following services at thetime of their contract renewal:

 

•                  Content & Collaboration Strategies

•                  Enterprise Analytics Strategies

•                  Enterprise Application Strategies

•                  InfrastructureStrategies

•                  Integration & Development Strategies

•                  Operations Strategies

•                  Outsourcing & Service Provider Strategies

•                  Security & Risk Strategies

 

Following is adescription of the Company’s existing Advisory Services:

 

### ***Content & Collaboration Strategies***

###  

The efficient creation/capture, life-cycle management,and in-context delivery of information, coupled with strategies that improveinformation sharing, communication, and teamwork, are key to enterpriseproductivity, innovation, competitive advantage, and 

 

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overall business performance.  Unfortunately, the components that make up acomplete solution are typically procured, managed, and used independently. Tomaximize value, organizations must create a holistic worker knowledgeinfrastructure — a portfolio of technology investments that facilitatescontextual collaboration and in-context information delivery. META Group’sContent & Collaboration Strategies provides clients with research andguidance to help address this challenge.

 

### ***Enterprise Analytics Strategies***

###  

Monitoring and measuring business operational performance increases the value of information assets, and areessential to verify the effectiveness of all business processes andinitiatives. To excel, businesses must harness the convergence of businessstrategy, integrated information, and targeted analytics to drive enhancedenterprise performance and gain visibility across the enterprise. Such advancedongoing business decision making requires combinations of analytic applicationsand business intelligence tools — layered on a solid foundation of information architecture,data warehouse technologies, and project approaches. META Group’s EnterpriseAnalytics Strategies provides clients with the research and guidance to helpaddress this challenge.

 

### ***Enterprise Application Strategies***

###  

Packaged business applicationsare playing a key role in the mandate for business process excellence.Companies must evaluate their current suite of enterprise resource planning,best-in-class, and legacy applications, and determine when to renovate,replace, buy, or build. This new portfolio of business applications musteffectively support all constituents — partners, employees, customers, andsuppliers — and provide optimum collaboration among trading partners. METAGroup’s Enterprise Application Strategies provides clients with research andguidance to help address this challenge.

 

### ***Infrastructure Strategies***

###  

To meet evolving business requirements, ITorganizations must minimize underlying infrastructure complexity while speedingdesign decisions through best-practice approaches. Successful infrastructuredesign and selection practices will leverage existing infrastructure, defineand capitalize on standard application and infrastructure interfaces, andestablish the foundation for a dynamic service-oriented environment. With IT infrastructurenow entering a new era of virtualized, utility-based, adaptive infrastructure “grids,”organizations must establish business value for each investment step. METAGroup’s Infrastructure Strategies provides clients with the research andguidance to help address this challenge.

 

### ***Integration & Development Strategies***

###  

Companies and their IT departments are streamliningthe automation of their business processes — forcing extensive integration ofinternal and external applications. Cost-reduction pressures will fosterexperimentation with emerging technologies that promise improvements indevelopment productivity, system flexibility, and creation of reusableservices. Organizations must not only develop application development andproject management skills, but also master integration models. META Group’s Integration & DevelopmentStrategies provides clients with the research and guidance to help address thischallenge.

 

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### ***Operations Strategies***

###  

The delivery ofcost-effective, high-value IT services is highly dependent on the operationsgroup. Mastering IT operations — includingconsistent process execution, optimum service levels, complete fiscal and assetmanagement, and maximum resource leverage —is essential to fully realize the business value that operations candeliver to the overall organization. META Group’s Operations Strategiesprovides clients with the research and guidance to help address this challenge.

 

***Outsourcing& Service Provider Strategies***

 

Outsourcing services areexperiencing consistent growth. This increase in demand, new options inthe service provider market, and the trend toward “productized” services demandoptimized strategies to support outsourcing initiatives — and to obtain the optimumprice for any outsourced arrangements. With IT organizations facing a larger “multisourced”environment, managing coordinated,consistent outsourcing initiatives will be essential for ensuringcomprehensive service levels. METAGroup’s Outsourcing & Service Provider Strategies provides clients with theresearch and guidance to help address this challenge.

 

### ***Security & Risk Strategies***

###  

Information security is maturing as a discipline,physical security is getting a new focus, and business continuity (disasterrecovery) is receiving the investment needed to protect business operations.Security technologies for both enforcement and management are rapidly becomingtools for running the overall business — and the business of IT. However, stayingcurrent with evolving technologies and best practices (and ensuring they arescalable, repeatable, and capable of surviving) are essential for successfulsecurity practices within an organization. META Group’s Security & RiskStrategies provides clients with the research and guidance to help address thischallenge.

 

***EnterprisePlanning & Architecture Strategies***

 

Enterprise Planning &Architecture Strategies (“EPAS”) provides a resource to help IT executivescreate, maintain, and refine the key planning disciplines required to manage aneffective IT organization. By implementing enterprise strategy/planning,architecture, and program management best practices, IT organizations are morecapable of managing business requirements, aligning processes and technologywith business strategy, and improving the IT group’s credibility in deliveringvalue to the business. EPAS offers pragmatic guidance, enabling clients to setclear direction, assess effectiveness, enhance adaptability, reduce risk,increase focus, and lower total cost of ownership across the portfolio ofenterprise assets and activities.

 

# **Executive Services**

# ** **

***ExecutiveDirections***

 

Executive Directions (“ED”)provides guidance for speeding executive decisions and driving IT/businessvalue. ED offers executive officers one-on-one support and coaching 

 

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to improve theirorganizations’ information agility and credibility. ED is a member of METAGroup’s family of subject-specific advisory services, offering research andanalysis, “best method” insights, and bottom-line guidance.

 

##### ***ExecutiveDirections for Vendors***

#####  

Executive Directions forVendors provides focused and continuous support to IT vendor executives seekingto enhance their customer relationships and accelerate time-to-marketprofitability.  The service providesresearch and advice from the perspective of IT executives, leveraging METAGroup’s interaction with its corporate clients. Membership is limited to senior executives (sales, marketing, product development) from IT vendor organizations.

 

**Industry Services**

 

***EnergyInformation Strategies***

 

Energy Information Strategies (“EIS”) is a researchand advisory service aimed at meeting the needs of the rapidly transformingenergy industry.  The service deliversobjective guidance to energy company business and information technologyleaders, energy technology vendors, and other industry participants. Bystudying the entire energy industry, while leveraging research generated byMETA Group’s other advisory and consulting services, EIS provides advice toclients on issues vital to their business.

 

***GovernmentStrategies***

 

Government Strategies provides public-sectorstakeholders with actionable guidance that enables strategic programtransformation, economic stability, and extension of constituent services.Topical emphasis includes program/IT governance, establishment of ITcredibility and value, public-sector marketing, funding strategies, constituentrelationship management, and development and implementation of public policy.Government Strategies is a member of META Group’s family of industry-focusedadvisory services, offering government-specific research and analysis,best-method insights and guidance.

 

***InsuranceInformation Strategies***

 

InsuranceInformation Strategies focuses on the key issues and trends affecting theinsurance and financial services industries, targeting the new business modelsand technology frameworks critical to sustaining competitive advantage in aconstantly evolving market.  Topicalemphasis includes customer/partner relationship management; property andcasualty; life and annuities; health care; wealth management; vendor assessmentand selection; midtier strategies; and industry standards and architectures.Insurance Information Strategies is a member of META Group’s family ofindustry-focused advisory services, offering research, analysis and insightsand guidance to clients in the insurance and financial services sector***.***

 

***ProfessionalServices Strategies***

 

ProfessionalServices Strategies (“PSS”) provides support for firms looking to offerconsulting services. With the advent of new and multiple technologies,full-service delivery (spanning business strategy, applicationdevelopment/delivery, adaptive 

 

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infrastructure, and operations excellence) presents a majorchallenge to professional services firms. From customer relationship management(“CRM”) to supply chain management (“SCM”), and from e-commerce to globalconcerns, client requirements almost always cross service lines andorganizational entities. PSS focuses existing META Group services and knowledgeto provide professional services firms the means and intelligence to succeed inthis new business environment.

 

**Data Services**

 

***METAspectrum Evaluation Service***

 

METAGroup’s METAspectrum Evaluation Service is a source for analysis and insightinto selection and adoption of today’s hardware, software and IT services.  Utilizing META Group’s rigorous METAspectrumratings, along with a hands-on evaluation process, this service deliversobjective and custom research on market presence, performance, adaptability andfunctionality of vendors and offerings throughout the IT industry. The analysisand insight, together with guidance from META Group analysts, help clientorganizations make informed decisions for their business.

 

***Worldwide IT Benchmark Service***

 

METAGroup’s Worldwide IT Benchmark Service provides guidance to assist clientorganizations keep current with the latest trends and metrics regarding ITcosts, performance, and productivity. The Worldwide IT Benchmark Serviceprovides real-time benchmarking data resources designed to help clients improvethe performance of their IT investment portfolio and identify opportunities tobetter align spending and performance with industry norms.

 

***Human Capital Management Service***

 

META Group’s HumanCapital Management Service combines the practical guidance of META Group’sexperienced research analysts with analytical tools and data offered throughour annual IT Staffing and Compensation Guide.  The result is a solution that provides valueto IT and Human Resource professionals seeking to transform IT human capitalinto a competitive asset that can be applied profitably across the enterprise.This offering provides guidance in making effective decisions throughout theemployee life cycle, from the employee acquisition stage, to managing anddeploying skills and personnel within the organization.

 

**META Group Infusions**

 

##### ***Adaptive Infrastructure Strategies***

#####  

The Adaptive InfrastructureStrategies Infusion helps clients design and implementan infrastructure capable of rapidly responding to business challenges and newinitiatives. This structured transformation program provides a library of bestpractices for clients to deliver an adaptive infrastructure, while reducingcosts, increasing quality, and improving implementations. In addition, theprogram offers interactive workshops and working 

 

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sessions, practical models and methods, andspecialized research to tackle both day-to-day and long-term infrastructurechallenges.

 

#### ***Customer Relationship Management***

#### ** **

TheCustomer Relationship Management (CRM) Infusion is a structured transformationprogram that helps clients create action plans forcustomer relationship excellence. It is designed for companies at all stages ofCRM initiatives — whether developing a comprehensive CRM business strategy orsolving immediate customer (or technology) issues to build credibility. Theprogram combines a step-by-step approach for designing around the customer withthe Company’s detailed analytics, decision frameworks, and real-time advicefrom its subject-matter analysts. Organizations can create reusable CRMtreatments (i.e., customer, process, and technology patterns) that cut acrossmarketing, sales, service, and channel functions to produce a panoramic view ofeach customer segment — and optimize the value of each relationship type. CRMInfusion clients create these patterns through a series of projects that evolvetheir business processes, application portfolio, channels, and points ofinteraction into a multi-channel ecosystem.

 

***Enterprise Architecture***

 

TheEnterprise Architecture Infusion provides a capability that enables organizationsto create an adaptive architecture that assists in removing change barriers,while assisting in developing a high tolerance for the unanticipated changesthat every organization struggles to deal with. Offering a set of architecturalbest practices to guide IT organizations in the process of designing a flexibletechnical infrastructure, the Enterprise Architecture Infusion helps clientsassess effectiveness, enhance adaptability, and lower total cost of ownership.

 

***Operations Excellence***

 

The Operations Excellence Infusion providesbest-practice methods and tools, as well as metrics to track progress, fortransforming operations into a strategic asset capable of supporting the entireenterprise. This structured transformation program helps clients optimizeprocesses, contain costs, improve service delivery, and communicate value.

 

#### ***Security***

#### ** **

The Security Infusion enables the Company’s clients todrive excellence in security. This structured transformation program helpsclients refine security policies, optimize security processes, balance cost andrisk, and communicate value. Clients learn how to deploy a proven method forachieving security, despite complex internal organizational boundaries,conflicting business priorities, and corporate politics. The methods, tools,templates, and interactions with the Company’s analyst team help ensure successin the critical area of security and in support of major initiatives, such asWeb-based and business-to-business applications.

 

# **Published Research Products**

# ** **

The Company’s Published Research Products includeresearch reports and online 

 

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resources. Based on hands-on research, extensiveWeb and phone surveys and accompanying META Group Advisory Services research, theseresearch products offer thorough market research, practicalexecutive/operational guides and in-depth IT product evaluations. Certain ofthe Company’s Published Research Products may be purchased either as part of anannual service subscription contract or individually. Published ResearchProducts are included in the Company’s Advisory Services segment.

 

The Company’s Published Research Products aredelivered online via www.metagroup.com and are also available via non-standardelectronic and paper delivery options.

 

# **Strategic Consulting**

# ** **

Strategic Consulting offers project consultingservices that address clients’ business and technology challenges. The Company’sStrategic Consulting division combines tools, methods, and project managementskills with expertise to help mid to large-sized businesses increase returnsfrom technology investments. META Group’s collaborative client approach helpsclients map out the required actions to achieve leading industry practicethrough independent, objective analysis that leverages the Company’s AdvisoryServices research and analysis. Focusing on critical business imperatives, theCompany’s consultants use proven discovery, development, and deliverytechniques and methods, based on our actionable research programs, to helpclients maximize their business and technology performance.

 

Strategic Consulting targets executives at both largeand medium sized end-user organizations and IT vendors that serve suchorganizations. Large and medium sized end-user client organizations typicallyuse the Strategic Consulting services when they need to improve their businessperformance or reduce their business costs through the use of IT.  Such support includes constructing enterprisearchitectures and governance structures to better target technology spending;selecting, planning, and integrating new application systems; optimizingstrategic outsourcing support; planning adaptive infrastructure to effectivelyuse new technology; revitalizing data center or network operations functions tosupport new business demands; maximizing benchmarking and scorecards to enhanceIT performance; and using business intelligence to maximize the results of anenterprise’s customer strategy.

 

IT vendors also face significant challenges given thecomplexities in customer buying behavior, pressure from external forces (e.g.,competition, regulation) and internal practices that may not be optimized for arapidly changing environment — both economically and competitively. StrategicConsulting services address such challenges as vendor market positioningrelative to customer demands, communicating the value of their unique productor service; better targeting of potential buyers; competitive landscapeanalysis; and partnering/channel strategies.

 

**RESEARCH AND ANALYSIS**

 

The Company employs a consistent, disciplined researchand analysis methodology through several Research Directors and a ResearchOperations Management team that are 

 

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responsible for guiding the Company’s research andanalysis methodology, as well as its productization and fulfillment. Theseresearch personnel are also tasked with coordination across research groups. The development methodology consists ofan iterative process of research, analysis, hypothesis, testing, peer reviewand research management review. Analysts conduct extensive primary research,working with the Company’s user client base, surveying vendors and users, andcontacting other sources. These activities are supplemented with searches ofnumerous trade, financial, and other third-partysource materials compiled in the Company’s resource center.

 

A variety of formal and informal channels are used tobuild consensus and coordinate research positions. Individual research topics aregrouped into research practice areas that include all analysts and consultantscovering a particular topic. The research practice areas have a designatedleader that works with participants to facilitate the creation of the Company’spositions. The results of these meetings are published to clients in the weeklyMETA Client Advisor. Information gathered during vendor meetings, clientinteractions and other research activity is organized into internal knowledgebases and shared across the entire research community. Three times a week asubset of META analysts and consultants meet electronically to examine aparticular topic and create a joint news analysis document outlining theCompany’s common position. A meeting of the entire META Group research staff isheld weekly, at which findings are presented and scrutinized. From thisresearch, analysts identify significant patterns and trends, developassumptions, test hypotheses, and arrive at concrete recommendations andconclusions to provide to clients.

 

The knowledge andexperience of the Company’s analysts is critical to the quality of the Company’sproducts and services. To ensure consistency of positions and analysis acrossservice disciplines, all of the Company’s research is reviewed by one of theCompany’s senior research executives. While varying opinions and philosophicalcontention among services and research disciplines are encouraged, finalpositions and conclusions are consistent. This practice ensures that theanalytical structure and recommendations presented in the Company’s researchbetter enable the various elements of client organizations to formulateintegrated strategies based on coherent information and analysis.

 

# **SALES AND MARKETING**

# ** **

The Company uses a directsales force domestically and uses subsidiaries, as well as a network of localindependent sales representative organizations internationally to market andsell its products and services. The Company’s domestic direct sales forceconsists of sales people located throughout the United States. They aresupported by teams of inside sales people, relationship managers andadministrative personnel located in the Company’s regional offices and at itsheadquarters. The inside sales department is an important source of PublishedResearch Products sales, sales to vendors, and sales to emerging vendors andsmall to medium-sized enterprises.

 

Internationally, the Company utilizes bothsubsidiaries and independent sales representative organizations to sell itsproducts and services throughout the Americas, Europe, the Middle East andAfrica and Asia Pacific. Beginning in November 2000, the Company beganacquiring its independent sales representative organizations and to date hasconcluded acquisitions in Canada, Asia Pacific, Europe and the Middle East. See“Management’s

 

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Discussion and Analysis of Financial Condition and Results ofOperations” and notes to the consolidated financial statements.

 

Under the terms of the Company’s agreements with independentsales representative organizations, such organizations are assigned exclusiveterritories and annual quotas. These organizations also perform selected clientservice functions, and bill and collect revenues attributable to clients withintheir territories. The Company recognizes Advisory Services revenues fromindependent sales representative organizations at rates of 40% to 75% ofamounts billed to those clients. See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Risk Factors — *Our International Operations Expose Us to a Varietyof Risks*.”

 

The Company also marketsand sells certain of its products and services and provides additional contentto its internet subscribers on its website, www.metagroup.com.

 

# **CLIENT SUPPORT**

# ** **

The Company is committedto providing a high level of client service as defined by response time,clarity of advice, and quality of communication. The Company’s analysts respondto clients’ inquiries and concerns as they arise. Analysts’ regular contactwith clients through telephone consultations, e-mail, briefings, and eventsalso provides the Company with feedback that is used to improve its services.In addition, the Company’s research library frequently performs client-specifictopical searches on particular IT issues. The Company also maintains a keyissues database that identifies areas of particular concern to clients andregularly uses customer satisfaction surveys to improve service levels. As anintegral part of the Company’s commitment to customer service, the Companymaintains a select Client Services team that routes requests for information tothe right resource.

 

**COMPETITION**

 

The Company targets as its clientssubstantial commercial and governmental users of IT, as well as IT vendors. TheCompany experiences competition in this market for IT research/analysisproducts and services and strategic consulting services from other independentproviders of similar services, as well as from the internal planning andmarketing staffs of the Company’s current and prospective clients. The Company’sprincipal direct competitor for advisory services, Gartner, Inc., has asubstantially longer operating history, is significantly larger, and hasconsiderably greater financial resources and market share than the Company. TheCompany also competes indirectly against numerous other information andconsulting service providers, including electronic and print media companiesand consulting firms. The Company’s indirect competitors could choose tocompete directly against the Company in the future. In addition, although theCompany believes it has established a significant market presence, there arefew barriers to entry into the Company’s market — and new competitors couldreadily seek to compete against the Company in one or more market segmentsaddressed by the Company’s Advisory Services, Strategic Consulting services,and Published Research Products. Increased competition could adversely affectthe Company’s operating results through pricing pressure and loss of marketshare. There can be no assurance that the Company will be able to continue tocompete successfully against existing or new competitors. See “Management’sDiscussion and 

 

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Analysis of Financial Condition and Results of Operations — RiskFactors — *We Have Many Competitors Who Maybe More Effective Than Us*.”

 

The Company believes that, with respect to both ITresearch/analysis products and services and strategic consulting services, theprincipal competitive factors are quality of research and analysis applied inthe context of client IT environments, timely delivery of relevant information,client support and responsiveness, the ability to offer products and servicesthat meet changing market needs for information and analysis, and price, andthe independence and objectivity upon which these products and services areprovided. The Company believes it competes favorably with respect to each ofthese factors.

 

**EMPLOYEES**

 

As of December 31, 2004, the Company employed 631people. The Company considers its relations with its employees to be good.

 

The Company’s futuresuccess depends in large part on the ability to continue to motivate and retainhighly qualified employees, including management personnel, and to attract andretain qualified personnel, including research analysts, consultants, salespersonnel, and product development and operations staff. Competition forqualified personnel in the Company’s industry continues to be intense, and manyof the companies with which the Company competes for qualified personnel,including Gartner, Inc., have substantially greater financial and otherresources than the Company. There can be no assurance that the Company will beable to recruit, retain, and motivate a sufficient number of qualifiedpersonnel to compete successfully. The loss of any of the Company’s seniormanagement personnel or any material failure to recruit, retain, and motivate asufficient number of qualified personnel could have a material adverse effecton the Company. See “Management’s Discussion and Analysis of FinancialCondition and Results of Operations — Risk Factors  —  *WeMay Not be Able to Attract and Retain Qualified Personnel*.”

 

**RECENT BUSINESS DEVELOPMENTS**

 

### **Acquisitions**

###  

InApril 2004, the Company acquired 100% of META Group Middle East for $950,000 incash.  The Company acquired thisdistributor in order to have full ownership control in the Middle East (otherthan Israel) to better serve its customers in the region. The purchase price hasbeen allocated to the assets acquired and the liabilities assumed, based onestimated fair values at the date of acquisition. The preliminary allocationresulted in goodwill of $1.1 million recorded in the Advisory Services segmentand $0.5 million recorded in the Consulting segment and $0.4 million related tothe customer list of the seller, which is being amortized on the straight linemethod over 7 years.

 

In September 2003, theCompany acquired 100% of META Group Norway A/S, META Group Sweden AB, METAGroup Finland OY, META Group Denmark A/S, META Group Belgium SA and META GroupNederland BV (collectively “META Group Northern Europe”). The purchase priceconsisted of $3.6 million in cash and 175,000 shares of the Company’s commonstock (valued 

 

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at $700,000), as well as forgiveness of $2.6million in promissory notes and $1.5 million in trade receivables owed to theCompany by the Northern European entities. The purchase price has been allocatedto the assets acquired and the liabilities assumed, based on estimated fairvalues at the date of acquisition.  Theallocation resulted in goodwill of $4.5 million recorded in the AdvisoryServices segment, $440,000 recorded in the Consulting segment and $3.9 millionrelated to the customer list of the seller, which is being amortized over 7years.

 

In August 2003, the Companyacquired 100% of META Group UK Holdings Limited (“META Group UK”) for $1.6million in cash. The purchase price has been allocated to the assets acquiredand the liabilities assumed, based on estimated fair values at the date ofacquisition.  The allocation resulted ingoodwill of $256,000 recorded in the Advisory Services segment, $140,000 recordedin the Consulting segment and $1.3 million related to the customer list of theseller, which is being amortized over 7 years.

 

In June 2003, the Companyacquired 100% of META Group Italia S.R.L. (“META Group Italy”) for $280,000 incash. The purchase price has been allocated to the assets acquired and theliabilities assumed, based on estimated fair values at the date ofacquisition.   The allocation resulted ingoodwill of $203,000 recorded in the Advisory Services segment, $60,000recorded in the Consulting segment and $300,000 related to the customer list ofthe seller, which is being amortized over 7 years.

 

**WorkforceReductions**

 

During the quarter ended December 31, 2004, theCompany reduced its workforce by 32 persons and recorded a $1,755,000 chargefor severance payments accrued during the quarter.

 

During the quarter ended September 30, 2003, theCompany reduced its workforce by 17 persons and recorded a $225,000 charge forseverance payments accrued during the quarter.

 

During the quarter ended December 31, 2003, theCompany reduced its workforce by 24 persons and recorded a $1.4 million chargefor severance payments accrued during the quarter. See “Management’s Discussionand Analysis of Financial Condition and Results of Operations” for a furtherdiscussion of the above matter.

 

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**ITEM 2.****          PROPERTIES**

 

The Company’s headquarters are located inapproximately 115,000 square feet of leased office space in Stamford,Connecticut. This facility accommodates the Company’s Advisory Services and StrategicConsulting segments. The Company also leases office space in other U.S.locations, as well as locations in Canada, Europe, the Asia Pacific region andthe Middle East to support its two segments. The Company believes that itsexisting facilities are adequate for its current needs and thatadditional facilities are available for lease to meet future needs.

 

**ITEM 3.****          LEGALPROCEEDINGS**

 

Other than ordinary routine litigation incidental tothe Company’s business, the Company is not a party, nor is any of its propertysubject to, any pending legal proceedings.

 

**ITEM 4.****      SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

No matters were submitted to a vote of the Company’sstockholders during the fourth quarter of the year ended December 31, 2004.

 

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**PART II**

 

**ITEM 5.****         MARKET FORREGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

The Company’s common stock (the “Common Stock”) tradeson the Nasdaq National Market under the symbol “METG”.

 

The following table reflects the range of high and lowbid quotations, as reported on the Nasdaq National Market, for the Common Stockin each quarter of the years ended December 31, 2004 and 2003.

 
| ** **     | ** ** | **High**   | ** ** | **Low**    | ** ** |
|----------------|------------|------------|------------|------------|------------|
| **2004:**      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fourth Quarter |       | $          | 9.89       |       | $          | 4.56 |   |
| Third Quarter  |       | $          | 5.10       |       | $          | 3.50 |   |
| Second Quarter |       | $          | 5.99       |       | $          | 3.01 |   |
| First Quarter  |       | $          | 6.75       |       | $          | 5.15 |   |
| ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **2003:**      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fourth Quarter |       | $          | 6.30       |       | $          | 4.80 |   |
| Third Quarter  |       | $          | 5.59       |       | $          | 3.65 |   |
| Second Quarter |       | $          | 6.34       |       | $          | 3.37 |   |
| First Quarter  |       | $          | 4.15       |       | $          | 2.05 |   |

 

On March 22, 2005, the closing price of the CommonStock was $ 9.97, as reported on the Nasdaq National Market. On that date,there were approximately 202 holders of record of the Common Stock and approximately902 beneficial holders, based on information obtained from the Company’stransfer agent.

 

The Company has never paid cash dividends on itsCommon Stock, and did not repurchase any of its shares during fiscal 2004. Anyfuture declaration and payment of dividends will be subject to the discretionof the Company’s Board of Directors (the “Board of Directors”), will be subjectto applicable law, and will depend on the Company’s results of operations,earnings, financial condition, contractual limitations, cash requirements,future prospects, and other factors deemed relevant by the Board of Directors.The Board of Directors has no current intention of paying any cash dividends onthe Common Stock.

 

In September 2003, theCompany acquired 100% of META Group Norway A/S, META Group Sweden AB, METAGroup Finland OY, META Group Denmark A/S, META Group Belgium SA and META GroupNederland BV (collectively “META Group Northern Europe”). As part of thepurchase price, the Company issued 175,000 shares of its common stock valued at$700,000.

 

See “Management’s Discussion and Analysis of FinancialCondition and Results of Operations – Liquidity and Capital Resources” for afurther discussion of the above matter.  Alsosee Item 12 of Part III of this Form 10-K for the Company’s Equity CompensationPlan Information table.

 

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# **ITEM6.**                             SELECTEDFINANCIAL DATA

# ** **

The selected financialdata presented below is derived from the consolidated financial statements ofthe Company and should be read in connection with those statements, which areincluded herein.

 
| ** **                                                                                             | ** ** | **Year Ended December 31,**               | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002 (1)** | ** ** | **2001** | ** ** | **2000 (2)** | ** ** |
| ** **                                                                                             | ** ** | **(In thousands, except per share data)** | ** ** |
| **Statement  of Operations Data:**                                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Total revenues                                                                                         |       | $                                         | 141,501    |   | $ | 122,485 |   | $ | 116,533 |   | $ | 119,981 |   | $ | 122,063 |   |
| Operating loss                                                                                         |       | (1,643                                    | )          | (4,793 | ) | (4,926 | ) | (13,389 | ) | (10,003 | ) |
| Loss before  income taxes, minority interest, and cumulative effect of change in  accounting principle |       | (1,666                                    | )          | (4,009 | ) | (6,145 | ) | (20,491 | ) | (12,282 | ) |
| Loss before  cumulative effect of change in accounting principle                                       |       | (2,163                                    | )          | (4,305 | ) | (19,274 | ) | (17,610 | ) | (8,038 | ) |
| Cumulative  effect of change in accounting principle                                                   |       | —                                    |       | — |   | (22,206 | ) | — |   | (2,438 | ) |
| Net loss                                                                                               |       | $                                         | (2,163     | ) | $ | (4,305 | ) | $ | (41,480 | ) | $ | (17,610 | ) | $ | (10,476 | ) |
| **Per  Share - Basic and Diluted**                                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Loss before  cumulative effect of change in accounting principle                                       |       | $                                         | (0.16      | ) | $ | (0.32 | ) | $ | (1.47 | ) | $ | (1.47 | ) | $ | (0.75 | ) |
| Cumulative  effect of change in accounting principle                                                   |       | —                                    |       | — |   | $ | (1.70 | ) | — |   | $ | (0.22 | ) |
|                                                                                                   |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                               |       | $                                         | (0.16      | ) | $ | (0.32 | ) | $ | (3.17 | ) | $ | (1.47 | ) | $ | (0.97 | ) |
|                                                                                                   |       |                                      |       |   |   |   |   |   |   |   |   |
| Weighted average  number of basic and diluted common shares outstanding                                |       | 13,865                                    |       | 13,334 |   | 13,067 |   | 11,960 |   | 10,763 |   |

 
| ** **                                                 | ** ** | **December  31,**    | ** ** |
|------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                 | ** ** | **2004**             | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                 | ** ** | **(In  thousands )** | ** ** |
| **Balance  Sheet Data:**                                   |       |                 |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents (including restricted balances) |       | $                    | 12,899     |   | $ | 14,814 |   | $ | 21,448 |   | $ | 21,433 |   | $ | 3,622 |   |
| Total assets                                               |       | 91,920               |       | 86,712 |   | 87,677 |   | 135,015 |   | 152,463 |   |
| Deferred revenues                                          |       | 46,740               |       | 48,891 |   | 42,400 |   | 45,827 |   | 44,087 |   |
| Non-current  portion – deferred revenues              |       | 19                   |       | 549 |   | 6,008 |   | 4,813 |   | 6,338 |   |
| Long-term debt                                             |       | —               |       | — |   | — |   | 5,111 |   | — |   |
| Other long-term  liabilities (3)                           |       | 2,279                |       | 2,284 |   | 2,558 |   | — |   | — |   |
| Total  stockholders’ equity                           |       | 12,454               |       | 10,074 |   | 13,216 |   | 52,786 |   | 65,708 |   |
|                                                            |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          TheCompany recorded an impairment charge of $22.2 million related to the carryingvalue of its goodwill as of January 1, 2002. The charge was recorded as the cumulative effect of a change in accountingprinciple.

(2)          TheCompany adopted the provisions of Staff Accounting Bulletin No. 101 “RevenueRecognition in Financial Statements”, effective January 1, 2000, and recorded acharge of $2.4 million as the cumulative effect of a change in accountingprinciple.

(3)          Includes$708, $1,040, and $589 of long term notes payable as of December 31, 2004,2003, and 2002, respectively.

 

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# **ITEM 7.**                             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

**Overview**

 

META Group, Inc. with its subsidiaries (collectivelythe “Company”) is a leading provider ofinformation technology (“IT”) research, advisory services, and strategicconsulting. The Company’s mission is to help clients be more efficient,effective, and timely in their use of IT to achieve their business goals.

 

In the quarter ended March31, 2004, the Company completed a reorganization of the management structureoverseeing Advisory Services and Published Research Products.  In addition, the Company also completed are-evaluation of its strategy around content generation and delivery as itrelates to Published Research Products. As a result, the Company has organized itself around two businesssegments:  Advisory Services andStrategic Consulting. The Advisory Services segment provides annually renewablesubscription services (focused on specific areas of IT, the special needs ofthe CIO and others within the IT organization, or the distinct IT/businessissues of specific industry markets and the public sector), service analystbriefing engagements, conferences, research reports and online resources whichoffer thorough market research, practical executive / operational guides andin-depth IT product evaluations. Supplementing these services are the Company’sInfusion programs, which provide an important bridge between traditionalAdvisory Services that examine broader industry issues and Strategic Consultingwhich drills into specific projects for a given client.  The Strategic Consulting segment offersproject consulting services that address clients’ business and technologychallenges. A significant portion of Strategic Consulting clients are alsoAdvisory Services subscribers.

 

***The CurrentEconomic Environment***

 

The economic climate in which we operate hasbeen difficult over the last three years, and capital spending has decreaseddramatically, including significant decreases in IT spending. This has had apronounced effect on our ability to generate revenues from our AdvisoryServices, Strategic Consulting and Published Research Products.  We believe we are well positioned to provideour Advisory Services, Strategic Consulting and Published Research Products toa growing customer base, but we cannot provide any assurance that thesepressures on IT spending will ease, or that the general economic climate willimprove.  Continued competitive pressureand a weak economy could have a continuing pronounced effect on our operatingresults. We have undertaken a variety of cost reduction measures designed tobring our operating expenses in line with our perceptions of the businessclimate, including workforce reductions.

 

***Significant Financial Events in 2004***

 

During2004, we achieved total revenue of $141.5 million, and reduced our loss beforeincome taxes, minority interest and cumulative effect of change in accountingprinciple by $2.3 million. In addition, in 2004 we acquired 100% of METAGroup Middle East.

 

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On December 26, 2004, META Group entered into adefinitive agreement (the “Agreement”) for Gartner, Inc. (“Gartner”) to acquireMETA Group (the “Merger”). Under the terms of the Agreement, META Group stockholderswill receive $10.00, without interest, in cash for each share of META Group commonstock held by them.  The Merger isexpected to become effective in the second calendar quarter of 2005. The Mergeris subject to regulatory review, approval by META Group stockholders andcertain other customary conditions.

 

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***Results ofOperations***

 

The following table setsforth, for the years indicated, the results of operations in thousands ofdollars, and results of operations as a percentage of total revenues:

 
| ** **                                                                                                          | ** ** | **2004**    | ** ** | **2003**    | ** ** | **2002**    | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                                                                                          | ** ** | **Dollars** |       | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Revenues:                                                                                                           |       |        |       |        |       |        |       |   |   |   |   |   |   |
| Advisory  services                                                                                                  |       | $           | 88,960     |        | **62.9**   |        | $          | 78,257 | ** ** | **63.9** |   | $ | 77,113 | ** ** | **66.2** | ** ** |
| Strategic  consulting                                                                                               |       | 44,126      |       | **31.2**    |       | 35,747      | ** ** | **29.2** |   | 32,009 | ** ** | **27.5** | ** ** |
| Published  research products                                                                                        |       | 5,735       |       | **4.0**     |       | 5,980       | ** ** | **4.9** |   | 4,940 | ** ** | **4.2** | ** ** |
| Reimbursable  expenses                                                                                              |       | 2,680       |       | **1.9**     |       | 2,501       | ** ** | **2.0** |   | 2,471 | ** ** | **2.1** | ** ** |
| Total revenues                                                                                                      |       | 141,501     |       | **100.0**   |       | 122,485     | ** ** | **100.0** |   | 116,533 | ** ** | **100.0** | ** ** |
| ** **                                                                                                          | ** ** | ** **  |       | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating  expenses:                                                                                                | ** ** | ** **  |       | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of services  and fulfillment                                                                                   |       | 70,227      |       | **49.6**    |       | 64,028      | ** ** | **52.3** |   | 59,182 | ** ** | **50.8** | ** ** |
| Reimbursable  expenses                                                                                              |       | 2,680       |       | **1.9**     |       | 2,501       | ** ** | **2.0** |   | 2,471 | ** ** | **2.1** | ** ** |
| Selling and  marketing                                                                                              |       | 40,307      |       | **28.5**    |       | 33,398      | ** ** | **27.3** |   | 31,114 | ** ** | **26.7** | ** ** |
| General and  administrative                                                                                         |       | 20,685      |       | **14.6**    |       | 19,721      | ** ** | **16.1** |   | 17,230 | ** ** | **14.8** | ** ** |
| Depreciation and  amortization                                                                                      |       | 4,745       |       | **3.4**     |       | 4,989       | ** ** | **4.1** |   | 6,281 | ** ** | **5.4** | ** ** |
| Restructuring  charges                                                                                              |       | 1,755       |       | **1.2**     |       | 1,642       | ** ** | **1.3** |   | 362 | ** ** | **0.3** | ** ** |
| Loss on  facilities leases                                                                                          |       | —      |       | **—**  |       | 999         | ** ** | **0.8** |   | 2,189 | ** ** | **1.9** | ** ** |
| Merger costs                                                                                                        |       | 2,329       |       | **1.7**     |       | —      | ** ** | **—** |   | — | ** ** | ** ** | ** ** |
| Loss on sale of  subsidiary                                                                                         |       | 416         |       | **0.3**     |       | —      | ** ** | **—** |   | — | ** ** | ** ** | ** ** |
| Goodwill  impairment loss                                                                                           |       | —      |       | **—**  |       | —      | ** ** | **—** |   | 2,630 | ** ** | **2.2** | ** ** |
| Total operating  expenses                                                                                           |       | 143,144     |       | **101.2**   |       | 127,278     | ** ** | **103.9** |   | 121,459 | ** ** | **104.2** | ** ** |
| ** **                                                                                                          | ** ** | ** **  |       | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating loss                                                                                                      |       | (1,643      | )          | **(1.2**    | **)**      | (4,793      | )          | **(3.9** | **)** | (4,926 | ) | **(4.2** | **)** |
| ** **                                                                                                          | ** ** | ** **  |       | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Other income  (expense):                                                                                            | ** ** | ** **  |       | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                                                | ** ** | ** **  |       | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Impairment loss  on investments                                                                                     |       | (154        | )          | **(0.1**    | **)**      | —      | ** ** | **—** |   | (1,075 | ) | **(1.0** | **)** |
| Other income  (expense), net                                                                                        |       | 131         |       | **0.1**     |       | 784         | ** ** | **0.6** |   | (144 | ) | **(0.1** | **)** |
| ** **                                                                                                          | ** ** | ** **  |       | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loss before  provision for income taxes, minority interest and cumulative effect of change  in accounting principle |       | (1,666      | )          | **(1.2**    | **)**      | (4,009      | )          | **(3.3** | **)** | (6,145 | ) | **(5.3** | **)** |
| ** **                                                                                                          | ** ** | ** **  |       | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Provision for  income taxes                                                                                         |       | 420         |       | **0.3**     |       | 173         | ** ** | **0.1** |   | 13,096 | ** ** | **11.2** | ** ** |
| ** **                                                                                                          | ** ** | ** **  |       | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Minority  interest in income of consolidated subsidiaries                                                           |       | 77          |       | **0.0**     |       | 123         | ** ** | **0.1** |   | 33 | ** ** | **—** | ** ** |
| Loss before  cumulative effect of change in accounting principle                                                    |       | (2,163      | )          | **(1.5**    | **)**      | (4,305      | )          | **(3.5** | **)** | (19,274 | ) | **(16.5** | **)** |
| ** **                                                                                                          | ** ** | ** **  |       | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cumulative  effect of change in accounting principle                                                                |       | —      |       | **—**  |       | —      | ** ** | **—** |   | (22,206 | ) | **(19.1** | **)** |
| ** **                                                                                                          | ** ** | ** **  |       | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                                                                            |       | $           | (2,163     | )           | **(1.5**   | **)**       | $          | (4,305 | ) | **(3.5** | **)** | $ | (41,480 | ) | **(35.6** | **)** |

 

Advisory Services revenues are principally annuallyrenewable contracts and are generally payable by clients in advance.  Billings attributable to the Company’sAdvisory Services are initially recorded as deferred revenues and thenrecognized pro rata over the contract 

 

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term.  Advisory Services revenues attributable tointernational clients not serviced by the Company’s subsidiaries are billed andcollected by its independent sales representative organizations. The Companyrealized Advisory Services revenues from the independent sales representativeorganizations at rates of 40% - 75% of the amounts billed to their clients.

 

One measure of the volume of the Company’s AdvisoryServices business is its “Contract Value,” which the Company calculates as theaggregate annual value of retainer subscription services contracts in force ata given point in time, without regard to the remaining duration of suchcontracts. Contract Value is not necessarily indicative of future AdvisoryServices revenues. Contract Value was $71.5 million at December 31, 2004 versus$73.0 million at December 31, 2003, a 2% decrease.

 

The Company recognizes revenue on Strategic Consultingengagements on a contract by contract basis, as the work is performed,utilizing the percentage of completion method for fixed fee projects, or asservices are rendered for time and material projects.

 

The Company recognizes revenues from the sale ofPublished Research Products when the products are delivered.

 

The Company’s operating expenses consist of cost ofservices and fulfillment, selling and marketing expenses, general andadministrative expenses and depreciation and amortization. Cost of services andfulfillment represents the cost associated with production and delivery of theCompany’s products and services and includes the costs of research,development, preparation of periodic reports, analyst telephone consultations,executive briefings and conferences, research reports, consulting services, newproduct development, and all associated editorial and support services. Sellingand marketing expenses include the costs of salaries, commissions, and relatedbenefits for selling and marketing personnel as well as travel and promotion,and bad debt expense.  General and administrativeexpenses include the costs of the administrative functions of the Company,including finance and accounting, corporate IT, legal, human resources, andcorporate management departments.  See “SegmentReporting” in Note 12 to the consolidated financial statements for informationregarding the Company’s operating segments.

 

# **Results of Operations**

# ** **

# **Years Ended December 31, 2004 and December 31, 2003**

# ** **

*Total Revenues.*   Total revenues increased 15.5% to $141.5 millionin 2004 from $122.5 million in 2003.

 

The table below gives an analysis of the major changes in revenues (inthousands):

 

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**Changesin Revenues – 2004 versus 2003**

** **
| ** **                   | ** ** | **Acquisitions(1)** | ** ** | **Ongoing Operations** | ** ** | **Foreign Exchange** | ** ** | **Net Change** | ** ** |
|------------------------------|------------|---------------------|------------|------------------------|------------|----------------------|------------|----------------|------------|
|                         |       |                |       |                   |       |                 |       |           |       |
| Advisory  Services           |       | $                   | 5,714      |                   | $          | 3,231                |       | $              | 1,758      |   | $ | 10,703 |   |
| Strategic  Consulting        |       | 4,420               |       | 2,005                  |       | 1,954                |       | 8,379          |       |
| Published  Research Products |       | 70                  |       | (471                   | )          | 156                  |       | (245           | )          |
| Reimbursable  Expenses       |       | 208                 |       | (113                   | )          | 84                   |       | 179            |       |
| Total                        |       | $                   | 10,412     |                   | $          | 4,652                |       | $              | 3,952      |   | $ | 19,016 |   |

 

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(1)          Netof divestiture

 

Revenues from Advisory Services increased 13.7%****to****$89.0 million in 2004 from $78.3 million in2003 and decreased as a percentage of total revenues to 63% from 64%. Theincrease in revenues was principally due to the acquisition of subsidiaries inItaly, the United Kingdom, and Northern Europe in 2003 and the Middle East in2004 (which collectively added incremental revenue of $5.7 million, net of thedivestiture of the Hungarian subsidiary), $3.2 million of increased revenuefrom ongoing operations, as well as the impact of foreign currency exchangerates on revenues from ongoing operations in Canada, Europe and the AsiaPacific region of $1.8 million.

 

Strategic Consultingrevenues increased 23.5% to $44.1 million in 2004 from $35.7 million in 2003,and increased as a percentage of total revenues to 31% from 29%. The increasewas principally due to the acquisition of subsidiaries in Italy, theUnited Kingdom, and Northern Europe in 2003 and the Middle East in 2004 (whichcollectively added incremental revenue of $4.4 million, net of the divestiture of the Hungariansubsidiary), $2.0 million of increased revenue from ongoing operations, as wellas the impact of foreign currency exchange rates on revenues from ongoingoperations in Canada, Europe and the Asia Pacific region of $2.0 million.

 

Published Research Products revenues decreased 5.0%to $5.7 million in 2004 from $6.0 million in 2003 and decreased as a percentageof total revenues to 4% from 5%. The decrease in revenues was principally dueto lower revenues from ongoing operations in the United States of $0.5 million,partially offset by the impact of foreign currency exchange rates on revenuesfrom ongoing operations in Canada, Europe and the Asia Pacific region of $0.2million, as well as $0.1 million due to the acquisition of subsidiaries inItaly, the United Kingdom and Northern Europe in 2003 and the Middle East in2004.

 

*Total Operating Expenses.   * Total operating expenses increased 12.4%to $143.1 million in 2004 from $127.3 million in 2003.

 

The table below gives an analysis of the major changes in operatingexpenses (in thousands):

 

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**Changesin Operating Expenses – 2004 versus 2003**

 
| ** **                             | ** ** | **Acquisitions(1)** | ** ** | **Ongoing  Operations** | ** ** | **Foreign  Exchange** | ** ** | **Net Change** | ** ** |
|----------------------------------------|------------|---------------------|------------|-------------------------|------------|-----------------------|------------|----------------|------------|
|                                   |       |                |       |                    |       |                  |       |           |       |
| Cost of Services  and Fulfillment      |       | $                   | 5,951      |                    | $          | (1,346                | )          | $              | 1,773      |   | $ | 6,378 |   |
| Selling and  Marketing Expenses        |       | 4,315               |       | 1,314                   |       | 1,280                 |       | 6,909          |       |
| General &  Administrative Expenses |       | 1,169               |       | (725                    | )          | 520                   |       | 964            |       |
| Depreciation and  Amortization         |       | 665                 |       | (1,041                  | )          | 132                   |       | (244           | )          |
| Restructuring  Charges                 |       | —              |       | 113                     |       | —                |       | 113            |       |
| Loss on  Facilities Leases             |       | —              |       | (999                    | )          | —                |       | (999           | )          |
| Merger Costs                           |       | —              |       | 2,329                   |       | —                |       | 2,329          |       |
| Loss on Sale of  Subsidiary            |       | —              |       | 416                     |       | —                |       | 416            |       |
| Total                                  |       | $                   | 12,100     |                    | $          | 61                    |       | $              | 3,705      |   | $ | 15,866 |   |

 

----

(1) Net of divestiture

 

*Cost of Services and Fulfillment*.   Cost of services and fulfillment, includingreimbursable expenses, increased 9.6% or approximately $6.4 million to $72.9million in 2004 from $66.5 million in 2003 and decreased as a percentage oftotal revenues to 52% from 54%. The increase was principally due to incrementalcosts of $6.0 million associated with subsidiaries in Italy, the United Kingdomand Northern Europe acquired in 2003 andthe Middle East in 2004 (net of the divestiture of the Hungariansubsidiary) and $1.8 millionfrom the impact of foreign exchange rates on the costs from ongoing operationsin Canada, Europe and the Asia Pacific region. These increases were partially offset by $1.3 million of decreased costsfrom ongoing operations (which reflects lower bonus costs of $1.3 million).

 

*Selling and Marketing Expenses*.   Selling and marketing expenses increased20.7% or approximately $6.9 million to $40.3 million in 2004 from $33.4 millionin 2003 and increased as a percentage of total revenues to 29% from 27%. Theincrease in selling and marketing expenses

 

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was principally due to incremental costs of $4.3 million associatedwith subsidiaries in Italy, the United Kingdom and Northern Europe acquired in2003 and the Middle Eastin 2004 (net of the divestiture of the Hungarian subsidiary), $1.3 million from the impact offoreign exchange rates on the costs from ongoing operations in Canada, Europeand the Asia Pacific region and $1.3 million of increased costs from ongoingoperations (which reflects $3.0 million of higher costs in foreign operations,partially offset by lower compensation costs of $2.4 million and lowermarketing expenses of $1.4 million and higher other expenses of $2.1 millionprincipally due to reversal of bad debt provisions in 2003 in the UnitedStates).

 

*General and Administrative Expenses*.   General and administrative expensesincreased 5.1 % or approximately $1.0 million to $20.7 million in 2004 from$19.7 million in 2003 and decreased as a percentage of total revenue to 15%from 16%. The increase in expenses was due principally to incremental costs of$1.2 million associated with subsidiaries in Italy, the United Kingdom andNorthern Europe acquired in 2003 andthe Middle East in 2004 (net of the divestiture of the Hungariansubsidiary), an increase in expenses of $0.5 million from the impact of foreignexchange rates on the costs from ongoing operations in Canada, Europe and theAsia Pacific region, which was partially offset by $0.7 million of decreasedexpenses in the ongoing operations ($2.7 million of lower costs in foreignoperations, partially offset by $2.0 million of higher compensation and othercosts in the United States).

 

*Depreciation and Amortization*.   Depreciation and amortization expensedecreased 4.0% or approximately  $0.2 million to $4.8 million in 2004from $5.0 million in 2003. The decrease was principally due to $1.0 million inlower depreciation expense on reduced levels of depreciable fixed assets in theUnited States, partially offset by $0.7 million of higher depreciation and amortizationexpense from incremental assets acquired as a result of the acquisitions ofsubsidiaries in Italy, the United Kingdom and Northern Europe in 2003, and the Middle East in 2004 (net ofthe divestiture of the Hungarian subsidiary) and $0.1 million from the impactof foreign exchange rates on the costs from ongoing operations in Canada,Europe and the Asia Pacific region.

 

*Restructuring Charges.*   During2004, the Company recorded restructuring charges totaling $1,755,000.  These charges were associated with workforcereductions, which totaled 32 employees in 2004 (from both domestic and foreignlocations).  The reduction represented inexcess of 5% of the Company’s total workforce at the time.  These workforce reduction plans wereinitiated in order to lower costs due to the reduced levels of IT spending bythe Company’s customers. With respect to the 2004 workforce reductions,$1,340,000 was unpaid as of December 31, 2004 and is expected to be paid in2005.

 

During 2003, the Company recorded $1,642,000 in restructuring chargesfor severance as a result of a reduction in its workforce of 41 persons(representing 5% of the workforce at the time). During 2003, $0.5 million ofthe total restructuring charges related to the subsidiary in Italy acquired in2003.  $1.2 million of the total 2003restructuring charges was unpaid as of December 31, 2003 and was paid in 2004.These workforce reductions were initiated in order to lower costs in responseto the reduced levels of IT spending by the Company’s customers.

 

*Loss on Facilities Leases*.   During 2003, the Company recorded losses of$1.0 million on certain of its domestic and German facilities leases. The lossespertain to vacated space in these facilities 

 

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for which costs will continue tobe incurred under the respective contracts for the remaining terms withouteconomic benefit to the Company. The fair value of the losses was computedbased on the aggregate remaining lease obligations of the vacant space reducedby estimated sublease rentals that the Company reasonably expects to obtain forthe space.

 

*Merger Costs  *On December 26, 2004, META Group entered into an Agreement and Plan of Merger with Gartner, Inc. (“Gartner”) whereby META Group agreed to be acquired by Gartner for a purchase price of $10.00 for each outstanding share of META Group stock, as well as the purchase of all outstanding stock options with an exercise price of less than $10.00 per share. META Group has scheduled a special meeting of its shareholders on March 23, 2005 to vote on the proposed offer by Gartner.  It is expected that the sale of META Group will be completed by the early second quarter of 2005.  The Company has recorded $2,329,000 in legal and merger advisory fees as of December 31, 2004. Such costs are not contingent upon the successful closing of the transaction.

 

*Loss on the Sale of Subsidiary*.In July 2004, the Company sold its 50.2% interest in META Hungary to theminority shareholders for net proceeds of $37,000, which pertained toforgiveness of a liability to META Hungary's minority shareholders.  The Company recorded a loss on the sale of$416,000.

 

*Impairment Loss on Investments andAdvances*. During 2004, the Company determined that, based on estimates of futurecash flows and other available market data, one of its investments in andadvances to companies in parallel industries was impaired. Accordingly, theCompany recorded an impairment loss of $154,000. The Company follows a practiceof reviewing its individual investments for impairment on a quarterly basis.This review includes the examination of the estimated market value of eachspecific investment using peer group market comparables of public companies.Additionally, the Company reviews the business operations of each company inwhich it has an investment, its historical financial results, its projectedcash flow, its plans for the future and the likelihoodof achieving such plans. Based on such review, a determination is made on acase-by-case basis as to whether an investment is deemed to be permanentlyimpaired and therefore requires an adjustment to the carrying value. TheCompany will continue to evaluate its investments for impairment every quarter,and based on its review, may record additional impairment losses should thefacts and circumstances in existence at that time merit such an adjustment.There were no impairment losses on investments andadvances recorded in 2003.  As ofDecember 31, 2004, the balance of the Company’s Investments and Advances was$1.0 million. See “Risk Factors– *OurInvestments Expose Us to Financial Risks*.”

 

*Other Income (Expense), net*.   During 2004, the Company recorded net interestand other income of $131,000, as compared to 2003, when the Company recordednet interest and other income of $784,000, consisting of $636,000 of otherincome, which was primarily the result of gains on the liquidation ofinvestments, and $148,000 of interest income earned on its cash balances, netof interest expense on bank borrowings. See Footnote 5 to the consolidatedfinancial statements.

 

*Provision (Benefit) for Income Taxes*.  During 2004, the Company recorded a provisionfor income taxes of $420,000 versus a provision for income taxes of $173,000 in2003.  These taxes represent state andforeign tax provisions, net of state tax refunds expected to be received.

 

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# **Years Ended December 31, 2003 and December 31, 2002**

 

*Total Revenues.*   Total revenues increased 5.1% to $122.5million in 2003 from $116.5 million in 2002.

 

The table below gives an analysis of the major changes in revenues (inthousands):

 

**Changes in Revenues – 2003 versus 2002**

 
| ** **                   | ** ** | **Acquisitions** | ** ** | **Ongoing Operations** | ** ** | **Foreign Exchange** | ** ** | **Net Change** | ** ** |
|------------------------------|------------|------------------|------------|------------------------|------------|----------------------|------------|----------------|------------|
|                         |       |             |       |                   |       |                 |       |           |       |
| Advisory  Services           |       | $                | 1,592      |                   | $          | (2,520               | )          | $              | 2,072      |   | $ | 1,144 |   |
| Strategic  Consulting        |       | 1,768            |       | (116                   | )          | 2,086                |       | 3,738          |       |
| Published  Research Products |       | 161              |       | 714                    |       | 165                  |       | 1,040          |       |
| Reimbursable  Expenses       |       | 179              |       | (214                   | )          | 65                   |       | 30             |       |
| Total                        |       | $                | 3,700      |                   | $          | (2,136               | )          | $              | 4,388      |   | $ | 5,952 |   |

 

Revenues from Advisory Services increased 1.6%****to****$78.3 million in 2003 from $77.1 million in2002 and decreased as a percentage of total revenues to 64% from 66%. The increasein revenues was principally due to the impact of foreign currency exchangerates on revenues from ongoing operations in Canada, Europe and the AsiaPacific region of $2.1 million, as well as the acquisition of subsidiaries inItaly, the United Kingdom, and Northern Europe in 2003 (which collectivelyadded incremental revenue of $1.6 million), partially offset by $2.5 million oflower domestic revenue resulting from general economic conditions and a trendof lower IT spending that began in the second half of 2000, as well as pricingpressures faced by the Company brought on by the decrease in IT spending. TheCompany currently expects decreases in IT spending and pricing pressure tocontinue for the foreseeable future.

 

Strategic Consulting revenues increased 11.6% to $35.7million in 2003 from $32.0 million in 2002, and increased as a percentage oftotal revenues to 29% from 27%. The increase was principally due to the impactof foreign currency of $2.1 million, as well as the acquisition of subsidiariesin Italy, the United Kingdom and Northern Europe in 2003 (which collectivelyadded incremental revenue of $1.8 million). These increases were partiallyoffset by a decrease of $0.1 million in the Company’s domestic consultingrevenues due to competitive pricing conditions as a result of decreases in anddelays of IT spending due to general economic conditions.   The Company currently expects decreases inIT spending and pricing pressure to continue for the foreseeable future.

 

Published Research Products revenues increased 22% to$6.0 million in 2003 from $4.9 million in 2002 and increased as a percentage oftotal revenues to 5% from 4%. The increase in revenues was principally due togreater demand for the Company’s Published Research Products in 

 

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the United States, partiallyoffset by decreased revenues in the Company’s Canadian subsidiary as well asthe Company’s international distributors.

 

*Total Operating Expenses.* Total operating expenses increased 4.8% to $127.3 million in 2003 from$121.5 million in 2002.

 

The table below gives an analysis of the major changes in operatingexpenses (in thousands):

 

**Changes in Operating Expenses – 2003 versus 2002**

** **
| ** **                            | ** ** | **Acquisitions** | ** ** | **Ongoing Operations** | ** ** | **Foreign Exchange** | ** ** | **Net Change** | ** ** |
|---------------------------------------|------------|------------------|------------|------------------------|------------|----------------------|------------|----------------|------------|
| ** **                            | ** ** | ** **       | ** ** | ** **             | ** ** | ** **           | ** ** | ** **     | ** ** |
| Cost of Services and Fulfillment      |       | $                | 2,779      |                   | $          | (65                  | )          | $              | 2,162      |   | $ | 4,876 |   |
| Selling and Marketing Expenses        |       | 586              |       | 732                    |       | 966                  |       | 2,284          |       |
| General & Administrative Expenses |       | 1,244            |       | 5                      |       | 1,242                |       | 2,491          |       |
| Depreciation and Amortization         |       | 243              |       | (1,765                 | )          | 230                  |       | (1,292         | )          |
| Restructuring Charges                 |       | 462              |       | 818                    |       | —               |       | 1,280          |       |
| Loss on Facilities Leases             |       | —           |       | (1,190                 | )          | —               |       | (1,190         | )          |
| Goodwill Impairment Loss              |       | —           |       | (2,630                 | )          | —               |       | (2,630         | )          |
| Total                                 |       | $                | 5,314      |                   | $          | (4,095               | )          | $              | 4,600      |   | $ | 5,819 |   |

 

*Cost of Services and Fulfillment*.  Cost of services and fulfillment, includingreimbursable expenses, increased 8.0% or approximately $4.9 million to $66.5million in 2003 from $61.6 million in 2002 and increased as a percentage oftotal revenues to 54% from 53%. The increase was principally due to incrementalcosts of $2.8 million associated with subsidiaries in Italy, the United Kingdomand Northern Europe acquired in 2003, and $2.2 million from the impact offoreign exchange rates on the costs from ongoing operations in Canada, Europeand the Asia Pacific region, partially offset by decreased costs in ongoingoperations of $0.1 million.

 

*Selling and Marketing Expenses*.  Selling and marketing expenses increased 7.4%or approximately $2.3 million to $33.4 million in 2003 from $31.1 million in2002 and remained level as a percentage of total revenues at 27% for bothyears. The increase in selling and

 

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marketing expenses was due to $1.0 million from the impact of foreignexchange rates on the costs from ongoing operations in Canada, Europe and theAsia Pacific region and $0.6 million in incremental personnel costs associatedwith subsidiaries in Italy, the United Kingdom and Northern Europe acquired in2003. Selling and marketing expenses from ongoing operations increased $0.7million due to the following: $1.0 million of increased expenses associatedwith the marketing and branding campaign launched in 2003, and $1.7 million ofincreased personnel costs (compensation and related benefits) resulting from anincrease in the total number of selling and marketing personnel during theyear. These increases were partially offset by the following: 2003 expenseswere reduced by reversing $0.6 million of provisions for distributor bad debtsand $0.4 million of other accounts receivable provisions, and 2002 expensesincluded a $1.0 million charge for distributor bad debts.

 

*General and Administrative Expenses*.  General and administrative expenses increased14.5 % or approximately $2.5 million to $19.7 million in 2003 from $17.2 millionin 2002 and increased as a percentage of total revenue to 16% from 15%. Theincrease in expenses was due to $1.2 million from the impact of foreignexchange rates on the costs from ongoing operations in Canada, Europe and theAsia Pacific region and incremental costs of $1.2 million associated withsubsidiaries in Italy, the United Kingdom and Northern Europe acquired in2003.  General and administrativeexpenses from ongoing operations were basically unchanged from 2002 to 2003.

 

*Depreciation and Amortization*.  Depreciation and amortization expensedecreased 20.6% or approximately  $1.3 million to $5.0 million in 2003from $6.3 million in 2002. The decrease was principally due to $1.8 million inlower depreciation expense on reduced levels of depreciable fixed assets,partially offset by $0.3 million of higher amortization expense on intangibleassets acquired as a result of the acquisitions of subsidiaries in Italy, theUnited Kingdom and Northern Europe in 2003, and $0.2 million from the impact offoreign exchange rates on the costs from ongoing operations in Canada, Europeand the Asia Pacific region.

 

*RestructuringCharges.* During 2003, the Company recorded $1.6 million in restructuring chargesfor severance accruals in the third and fourth quarters as a result of areduction in its workforce of 41 persons (representing 5% of the workforce atthe time). During 2003, $0.5 million of the total restructuring charges relatedto the subsidiary in Italy acquired in 2003. $1.2 million of the total 2003 restructuring charges was unpaid as ofDecember 31, 2003 and were paid in 2004. These workforce reductions wereinitiated in order to lower costs in response to the reduced levels of ITspending by the Company’s customers.

 

During 2002, the Company recorded $0.4 million in restructuringcharges. In February 2002, the Company reduced its workforce by 43 persons(representing 7% of the workforce at the time), and incurred a $0.2 millionrestructuring charge for severance payments made during the quarter ended March31, 2002. During the quarter ended September 30, 2002, META Group Germanyreduced its workforce by 10 persons and recorded a $0.2 million restructuringcharge for severance payments that were made during the quarter ended December31, 2002.

 

*Loss on Facilities Leases*.  During 2003 and 2002, the Company recordedlosses of $1.0 million and $2.2 million, respectively, on certain of itsdomestic and German facilities leases. The losses pertain to vacated space inthese facilities for which costs will continue to be incurred under therespective contracts for the remaining terms without economic benefit to theCompany. The fair

 

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value of the losses was computed based onthe aggregate remaining lease obligations of the vacant space reduced byestimated sublease rentals that the Company reasonably expects to obtain forthe space.

 

*Goodwill Impairment Loss*.  As of September 30, 2002, the Companycompleted the second step of the impairment test prescribed by Statement ofFinancial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (“SFAS142”) and determined that the goodwill associated with the Strategic Consultingand Published Research Products segments was impaired. Accordingly, the Companyrecorded a goodwill charge of $22.2 million relating to the carrying value ofthe goodwill of these segments as of January 1, 2002. The impairment charge wasrecorded as the cumulative effect of a change in accounting principle andrecorded retroactive to January 1, 2002. Additionally, during the nine monthsended September 30, 2002, the Company recorded a $2.6 million goodwillimpairment loss resulting from the Company’s annual goodwill impairment test inaccordance with the provisions of SFAS 142. The impaired goodwill related tothe Strategic Consulting and the then separate Published Research Productssegments and resulted from the acquisition of an additional interest in METAGroup Germany and contingent consideration earned by Rubin Systems, Inc. andthe Verity Group in 2002. The Company conducted an impairment review of itsgoodwill during 2003, and concluded that there was no impairment to goodwillrequired to be recorded in 2003.

 

*Impairment Loss on Investments and Advances*.  During 2002, the Company determined that,based on estimates of future cash flows and other available market data,several of its investments in and advances to companies in parallel industrieswere impaired. Accordingly, the Company recorded an impairment loss of $1.1million. The Company follows a practice of reviewing its individual investmentsfor impairment on a quarterly basis. This review includes the examination ofthe estimated market value of each specific investment using peer group marketcomparables of public companies. Additionally, the Company reviews the businessoperations of each company in which it has an investment, its historicalfinancial results, its projected cash flow, its plansfor the future and the likelihood of achieving such plans. Based on suchreview, a determination is made on a case-by-case basis as to whether aninvestment is deemed to be permanently impaired and therefore requires anadjustment to the carrying value. The Company will continue to evaluate itsinvestments for impairment every quarter, and based on its review, may recordadditional impairment losses should the facts and circumstances in existence atthat time merit such an adjustment. There were noimpairment losses on investments and advances recorded in 2003.  See discussion of liquidation gains in “Other(Expense) Income, net below.  As ofDecember 31, 2003, the balance of the Company’s Investments and Advances was$1.1 million. See “Risk Factors– *OurInvestments Expose Us to Financial Risks*.”

 

*Other Income (Expense), net*.  During 2003, the Company recorded netinterest and other income of $784,000, consisting of $636,000 of other income,which was primarily the result of gains on the liquidation of investments, and$148,000 of interest income earned on its cash balances, net of interest expenseon bank borrowings. This compares with net interest and other expense of$144,000 in the year 2002.

 

*Provision (Benefit) for Income Taxes*.  During 2003, the Company recorded a provisionfor income taxes of $173,000.  During theyear 2002, the Company recorded a provision for income taxes of $13.1 million,which included a $12.2 million valuation allowance established against itsdeferred income tax assets, which consisted of net operating loss carryforwardsfor income tax

 

32

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purposes and temporary differences betweenthe financial reporting basis and the income tax basis of the Company’s assetsand liabilities. In view of the Company’s losses over its recent history, adetermination was made that a valuation allowance should be established for thefull amount of recorded deferred tax assets.

 

**Liquidity and Capital Resources**

 

The Company fundsits operations primarily through cash generated from operations, and, to alesser extent, from borrowings under its credit facility and from the sale ofits common stock. The Company utilized $2.5 million in cash from operationsduring 2004, and generated cash from operations of $2.7 million in 2003 and$3.6 million in 2002. The decrease in operating cash flow in 2004 versus 2003was primarily due to increases in accounts receivable and other current assets,decreases in deferred revenues, partially offset by lower net loss and highernon-cash operating charges. The decrease in operating cash flow in 2003 versus2002 was due to lower accounts receivable collections in 2003, a reduction innet working capital and a reduction in non-cash operating charges.

 

The Company used $0.7 million, $1.0 millionand $1.1 million of cash in 2004, 2003 and 2002, respectively, for the purchaseof fixed assets. The purchases were principally made to support the Company’scomputer equipment, software and network infrastructure. The Company currentlyexpects to make additional purchases in 2005 and currently expects that suchexpenditures will remain approximately the same when compared to 2004 levels.As of December 31, 2004, the Company had no material commitments for capitalexpenditures; however, the Company anticipates that it will continue to upgradeits internal systems to support its business, including in particular itsinternational subsidiaries.

 

During 2004, the Company used $0.8 million(net of cash acquired) to fund the acquisition of 100% of META Group MiddleEast. This acquisition is described in greater detail above in “Recent BusinessDevelopments – Acquisitions”.  Inconnection with the sale of the Company’s Hungarian subsidiary, there was a netcash outflow which corresponded to Hungary’s cash balance at date of sale of$733,000.

 

During 2003, the Company used $2.9 million ofcash (net of cash acquired) to fund the acquisitions of 100% of META GroupItaly, META Group UK and META Group Northern Europe. There is no contingentconsideration related to these acquisitions. These acquisitions are describedin greater detail above in “Recent Business Developments – Acquisitions”.

 

During 2002, the Company expended $1.5 million of cash (net of cashacquired) to fund acquisitions and settle contingent payouts. The specifics ofthe acquisitions and payouts are as follows:

 

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*Acquisitionof Assets of Rubin Systems, Inc. (“RSI”)*

 

In October2000, the Company completed the acquisition of substantially all the assets ofRSI, a provider of IT trend-tracking, finance analysis and software engineeringmeasurement consulting, for an initial payment of $750,000 in cash, $375,000 incommon stock (36,874 shares) and the assumption of certain liabilities. During2001, the Company paid $1 million in cash and issued $250,000 in common stock(57,084 shares) as contingent consideration to RSI as a result of theachievement of certain financial targets. During 2002, the Company paid$569,000 in cash and $369,000 in the form of 202,499 shares of the Company’scommon stock as additional contingent consideration in connection with theachievement of certain financial targets by RSI and $500,000 in additionalconsideration in connection with the fair value of options to purchase theCompany’s common stock granted to Dr. Howard Rubin.  In August 2004, the Company and Dr. Rubinentered into an Amended and Restated Employment, Compensation and ReleaseAgreement (the “Restated Agreement”). The term of the Restated Agreement is through December 31, 2008, but issubject to earlier termination.  TheRestated Agreement supersedes the above-referenced earnout provisions, and provides, effective as of January 1, 2004, for the followingearnout arrangements:

 

•         Dr. Rubin’s earnout potential for theterm of the Restated Agreement is $2,300,000, split into equal $460,000 annualincrements for the years 2004 through 2008. Of the $460,000, Dr. Rubin can earn up to $230,000 per year based onCompany performance or other criteria established by the Company’s CompensationCommittee, and he can earn up to another $230,000 based on a percentage of theCompany’s WWB benchmark, WWB publication and WWB guru consulting revenue (“WWBRevenue”).  The amount earned is apercentage of the WWB Revenue is equal to ten percent, eight percent, sevenpercent, five percent and four percent in each of fiscal years 2004, 2005,2006, 2007 and 2008, respectively, capped at $230,000 per year.  No carryover is permitted.

 

•         Dr. Rubin is not eligible for anyearnout payments for a given fiscal year if his retainer consulting revenue forthe year is less than $1 million.

 

RSI is wholly owned byDr. Howard Rubin, an employee of the Company. The Company filed a registrationstatement which became effective in 2004 to register the shares issued to RSI.

 

*Acquisitionof META Group Germany*

 

During 2002, the Companyacquired the remaining 47% of META Group Germany (including the shares held bythe stockholders of Stratis Kft.) in exchange for $590,000 in cash, $412,000 inthe form of 267,285 options to purchase the Company’s common stock, andapproximately $924,000 in notes payable to certain of the former META GroupGermany shareholders, payable from January 2003 through January 2006.

 

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*META Group Germany Acquisition of StratisKft.*

 

Effective January 1, 2002, META Group Germany acquired a majorityinterest in the Company’s distributor in Hungary, Stratis Kft., forapproximately $327,000 paid in META Group Germany’s stock. Effective July 2004,the Company sold its interest in Stratis Kft.

 

*Acquisition of Assets of TheVerity Group*

 

In March 2002, theCompany paid $400,000 of contingent consideration to The Verity Group (“Verity”),an IT consulting company, as additional contingent consideration earned duringthe year ended December 31, 2001. The Company acquired certain assets of Verityin 1997 for an initial payment of $1,000 in cash and contingent considerationof up to $1.1 million in the event certain financial targets were met in eachof the four years in the period ended December 31, 2001. The aggregate considerationpaid by the Company amounted to approximately $1 million. There are no futurepayments remaining under the earnout.

 

Exclusive of itsacquisitions, the Company had previously made investments in and advances toseveral companies in parallel or synergistic industries, however, the Companydid not make any such investments or advances during 2004, 2003 and 2002. In2003 and 2002, the Company liquidated certain investments and received cashproceeds of $0.9 million and $2.3 million, respectively, and recognized gainsof $0.6 million and $0, respectively.

 

The balance of theCompany’s investments and advances was $1.0 million, $1.1 million and $4.0million at December 31, 2004, 2003 and 2002, respectively. Each investment isaccounted for under the cost method. See “Risk Factors— *Our Investments Expose Us to Financial Risks*.”

 

During 2004, theCompany received $2.2 million of cash from financing activities primarily fromthe proceeds of $3.0 million due to employees’ stock option exercises andemployee stock purchase plan, partially offset by capital lease payments of$0.4 million and repayment of notes payable of $0.4 million. During 2003, theCompany used $11.9 million of cash in financing activities primarily as aresult of repayments of $7.2 million of borrowings outstanding under theCompany’s credit facilities, and the establishment of a $6.0 million restrictedcash account as required by the Company’s credit facility discussed below.  The repayments were partially offset by $1million in bank borrowings and $633,000 in proceeds from the Company’s stockoption and stock purchase plans, and sale of treasury stock. During 2002, theCompany used $4.2 million of cash in financing activities primarily as a resultof repayments of borrowings outstanding under the Company’s credit facilities.The repayments were partially offset by $425,000 in proceeds from a privateplacement of common stock and $158,000 in proceeds from the Company’s stockoption and stock purchase plans.

 

In September 2002, five trusts affiliated with the Company’s formerPresident and Chief Executive Officer, Alfred J. Amoroso, purchased 125,000shares of the Company’s common stock. Additionally, two members of the Company’sBoard of Directors, Michael Simmons and Gayl W. Doster, purchased 20,000 and10,000 shares of the Company’s common stock, respectively. All of the shareswere purchased from META Group Germany at a purchase price of $2.74. Totalproceeds to META Group Germany were approximately $425,000.

 

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In March 2003, theCompany executed a new $6 million revolving credit agreement (the “AmendedFacility”). Under the Amended Facility, interest on any outstanding borrowingswill be payable at the rate of LIBOR, as determined by the bank, plus 1.5%, orthe higher of the Prime Rate or the Federal Funds Rate plus 0.5%. The AmendedFacility is fully collateralized by a $6 million cash deposit reflected asrestricted cash as of December 31, 2004 and December 31, 2003. The AmendedFacility contains no financial covenants, and matured in November 2004. TheCompany executed a five-month extension of its Amended Facility effective as ofNovember 4, 2004, which will extend the maturity date to April 4, 2005. TheCompany reclassified its restricted cash deposit to current assets inconnection with the short term facility extension.  As of December 31, 2004 and December 31,2003, there was $1,533,000 and $836,000, respectively, used under the AmendedFacility in the form of standby letters of credit issued on behalf of one ofthe Company’s independent sales representative organizations and as collateralfor a portion of the Company’s U.S. premises leases and equipment leases. Therewere no borrowings outstanding as of December 31, 2004 and December 31, 2003.

 

During the year 2004, theCompany paid $386,000 in satisfaction of the terms of notes payable held bycertain former shareholders of META Group Germany. The notes were acquired whenthe Company acquired the remaining interest in META Group Germany in September2002.  As of December 31, 2004,$1,195,000 remains payable under the notes, which are payable through November2008.

 

As of December 31, 2004the Company had outstanding a corporate guarantee in the amount of €62,000(approximately $85,000) guaranteeing lease payments to the landlord of one ofthe Company’s former independent sales representative organizations. In January2002, the landlord called the guarantee. The claim is currently beingnegotiated with the landlord. The Company is currently uncertain as to whenthis issue will be resolved.

 

As of December 31,2004, the Company had cash of $6.9 million, restricted cash of $6 million andnegative working capital of $16.7 million. Working capital increased by $5.1million in 2004 primarily due to the reclassification of the restricted cashcollateral account, increases in accounts receivable and other currentassets,  partially offset by increases inaccrued compensation and other accrued liabilities.  The Company generated a net loss of $2.2 millionfor 2004, and a net loss of $4.3 million for 2003. To return to profitability,the Company will need to, among other things, achieve revenue growth and/ormaintain expenses below revenue levels. The Company cannot be certain whether,or when, any of these will occur. If the Company fails to either achievesufficient revenue growth or maintain expenses below revenue levels, any suchfailure will likely result in continued losses that would have a materialadverse effect on the Company’s financial results and condition. See “RiskFactors – *If We are Unable to Return toProfitability it Could Impact Our Ability to Continue Our Operations*.”

 

TheCompany currently believes existing cash balances and anticipated cash flowsfrom operations will be sufficient to meet its working capital and capitalexpenditure requirements for the next 12 months. The Company also believes thatis has sufficient funds to maintain current operations and to complete itscurrent projects and plans.  The Companyintends to continue its efforts to monitor its accounts receivable collectionsand manage expenses. However, the Company also currently believes that ifdecreases in and delays of IT spending continue, that

 

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togetherwith competitive pricing pressure on the Company’s products and services, itwill continue to negatively impact the Company’s business. See “Risk Factors – *Decreases and Delays in IT Spending Could Lead toFurther Decreases in Our Revenues and Increase Our Net Losses*.”

 

Thefollowing table summarizes the Company’s contractual obligations and othercommitments as of December 31, 2004 and the effect such obligations arecurrently expected to have on its liquidity and cash flow in future periods (inthousands):

 
| ** **       | ** ** | **Twelve Months Ending December 31,** | ** ** |
|------------------|------------|---------------------------------------|------------|
| ** **       | ** ** | **2005**                              | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** |
|             |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Operating leases |       | $                                     | 6,436      |   | $ | 5,566 |   | $ | 5,577 |   | $ | 2,515 |   | $ | 1,439 |   | $ | 1,860 |   |
| Capital leases   |       | 431                                   |       | 222 |   | — |   | — |   | — |   | — |   |
| Merger fees *    |       | 3,649                                 |       | — |   | — |   | — |   | — |   | — |   |
| Notes payable    |       | 487                                   |       | 297 |   | 201 |   | 210 |   | — |   | — |   |
|             |       | $                                     | 11,003     |   | $ | 6,085 |   | $ | 5,778 |   | $ | 2,725 |   | $ | 1,439 |   | $ | 1,860 |   |

 

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*              Includes $1,811 of fees which will be paid only if themerger occurs.

 

**Critical Accounting Policies**

 

Our significant accounting policies are described in Note 1 to ourconsolidated financial statements. However, certain of our accounting policiesare particularly important to the portrayal of our financial position andresults of operations and may require the application of significant judgmentby our management; as a result they are subject to an inherent degree ofuncertainty. In applying those policies, our management uses its judgment todetermine the appropriate assumptions to be used in the determination ofcertain estimates. Those estimates are based on our historical experience, ourobservance of trends in the industry, information provided by our customers andinformation available from other outside sources, as appropriate. Oursignificant accounting policies include:

 

•                  RevenueRecognition – Revenues from our Advisory Services are recognized on astraight-line basis over the subscription contract period, generally one year.All subscription contracts are billable at signing, absent special termsgranted on a limited basis from time to time. As such, our policy is to recordat the time of signing of an Advisory Services subscription contract the feesreceivable and related deferred revenues for the full amount of thesubscription contract. Accounts receivable and deferred revenues that extendbeyond a 12-month period have been classified on the consolidated balancesheets as non-current. We also record the related sales commission obligationupon the signing of the subscription contract and amortize the correspondingdeferred commission expense over the subscription period in which the relatedAdvisory Services revenues are earned and amortized to income. We recognizerevenue on Strategic

 

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Consultingengagements on a contract by contract basis, as the work is performed,utilizing the percentage of completion method for fixed fee projects, or asservices are rendered for time and material projects. The average duration ofour consulting engagements is 2-3 months. Revenues from Published ResearchProducts are recognized at the time the applicable product is delivered.Additionally, we record reductions to revenue for estimated customercancellations.

 

•                  AccountsReceivable Reserves – We generally evaluate our accounts receivable on amonthly basis. As part of our analysis, we examine our collections history, theage of the receivables in question, any specific customer collection issuesthat we have identified, and general market conditions. At December 31, 2004and 2003, our total accounts receivable balances were $41.0 million and $38.9million, respectively. Based upon our analysis of estimated recoveries andcollections associated with the receivables balances, we have $1.1 million and$1.0 million of accounts receivable reserves at December 31, 2004 and 2003,respectively.  The determination of theamount of accounts receivable reserves is subject to significant levels ofjudgment and estimation by our management. If circumstances change or economic conditions deteriorate, we may needto increase the reserve.

 

•                  Deferred Tax Valuation Allowance–During 2002, we recorded a full valuation allowance against our deferred taxassets as a result of our losses over our recent history. We considered futuretaxable income versus the cumulative losses incurred during the previous threeyears and determined that, in light of the cumulative losses over our recenthistory, we could not support a conclusion that realization of the existingdeferred tax assets was more likely than not. During  2004 and 2003, there was nosubstantive change in the above circumstances. Should we determine that wewould be able to realize our deferred tax assets in the future, an adjustmentwill be made to the valuation allowance.

 

•                  Goodwill Valuation - Effective January 1,2002, we adopted Statement of Financial Accounting Standards No. 142, “Goodwilland Other Intangible Assets”**(“SFAS142”). SFAS 142 provides guidance on the financial accounting and reporting foracquired goodwill and other intangible assets. Under SFAS 142, goodwill andintangible assets deemed to have indefinite lives will no longer be amortized,but will be subject to impairment tests on an annual basis, or more frequentlyif certain indicators arise.  Intangibleassets with finite lives will continue to be amortized over their useful lives.

 

Withrespect to our goodwill recorded as of January 1, 2002, we completed theimplementation of FAS 142 as of September 30, 2002.  Based on the completion of the impairmenttest, it was determined that the goodwill associated with our StrategicConsulting and Published Research Products segments was impaired as of January1, 2002.  Accordingly, we recorded agoodwill charge of $22.2 million relating to the carrying value of the goodwillof these segments as of January 1, 2002.  The impairment charge was recorded as thecumulative effect of a change in accounting principle and recorded retroactiveto January 1, 2002.

 

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As of September30, 2002 we completed the annual impairment test for 2002 in accordance withthe provisions of SFAS 142.  As a resultof this test, it was determined that the goodwill associated with the StrategicConsulting and then separate Published Research Products segments was impaired. Accordingly, 2002 additions of $2.6million to these segments resulting from the acquisition of an additionalinterest in META Group Germany, and contingent consideration earned by RubinSystems, Inc.  and the Verity Group wererecorded as an impairment loss.

 

As of September30, 2004 and 2003 we completed the annual impairment tests for 2004 and 2003,respectively, in accordance with the provisions of SFAS 142.  There were no impairments of goodwill notedas a result of these tests.

 

As of December 31,2004, we have on our consolidated balance sheet goodwill of $15.5 millionassociated with the Advisory Services segment and $1.2 million associated withthe Strategic consulting segment.  Wetest this goodwill annually, or more frequently ifcertain indicators arise.

 

### **Impact ofRecently Issued Accounting Pronouncements**

###  

In December 2004, theFASB issued Statement of Financial Accounting Standards No. 123 (revised 2004),“Share-Based Payment” (“SFAS 123R”). This Statement is a revision of Statement of Financial AccountingStandards No. 123, “Accounting for Stock-Based Compensation”, and supercedesAPB Opinion no. 25, “Accounting for Stock Issued to Employees”, and its relatedimplementation guidance.  SFAS 123Rrequires expensing the fair value of stock options granted to employees.  These costs were previously permitted to bedisclosed on a pro-forma basis only in the footnotes to the financialstatements.  The effective date forimplementing the provisions of SFAS 123R is for all interim or annual reportingperiods that begin after June 15, 2005. The Company will adopt SFAS 123R on July 1, 2005, and depending uponfuture stock option grants, it may have a materialimpact on its financial statements.

 

In May 2003, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No.150, “Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity” (“SFAS 150”).  SFAS 150 changes the accounting for certainfinancial instruments that under previous guidance issuers could account for asequity.  It requires that thoseinstruments be classified as liabilities on a company’s balance sheets.  The guidance in SFAS 150 is generallyeffective for all financial instruments entered into or modified after May 31,2003, and otherwise is effective on July 1, 2003.  The Company adopted SFAS 150 on July 1, 2003,with no impact on its financial statements.

 

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In January 2003, the FASBissued FASB Interpretation No. 46 (as amended by FASB Interpretation No. 46R), “Consolidationof Variable Interest Entities”, an interpretation of ARB No. 51 (“FIN 46”). FIN46 clarifies the application of Accounting Research Bulletin No. 51, “ConsolidatedFinancial Statements”, to certain entities in which equity investors do nothave the characteristics of a controlling financial interest or do not havesufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties.  The Company currently does not have anyinterest in any unconsolidated entity for which variable interest entityaccounting is required and therefore FIN 46 did not impact the Company’sconsolidated financial statements.

 

**Risk Factors**

** **

***Our business and results of operations arelikely to be affected by our announced Merger with Gartner.***

 

On December26, 2004, we entered into a merger agreement with Gartner.  The announcement of the Merger could have anadverse effect on our revenue in the near term if customers delay, defer orcancel purchases pending consummation of the planned Merger.  While we are attempting to mitigate this riskthrough communications with our customers, current and prospective customerscould be reluctant to purchase our products and services due to potentialuncertainty about the direction of the combined company’s product offerings andits support and service of existing products. To the extent that our announcement of the Merger creates uncertaintyamong customers such that one large customer, or a significant group of smallcustomers, delays purchase decisions pending consummation of the plannedMerger, our results of operations and ability to operate profitably could benegatively affected.  Decreased revenueand a failure to be profitable could have a variety of adverse effects,including negative consequences to our relationships with customers, suppliers,resellers and others.  In addition, ourquarterly operating results could be substantially below the expectations ofmarket analysts, which could cause a decline in our stock price.  Finally, activities relating to the Merger andrelated uncertainties could divert our management’s and our employees’attention from our day-to-day business, cause disruptions among our relationshipswith customers and business partners, and cause employees to seek alternativeemployment, all of which could detract from our ability to grow revenue andminimize costs.

 

***If the conditions to the proposed Merger withGartner set forth in the merger agreement are not met, the Merger with Gartnermay not occur.***

 

Severalconditions must be satisfied to complete the proposed Merger with Gartner.  These conditions are set forth in detail inthe merger agreement, which was filed with the Securities and ExchangeCommission on December 29, 2004.  Wecannot assure you that each of the conditions will be satisfied.  If the conditions are not satisfied or waived,the proposed Merger will not occur or will be delayed, and META Group may losesome or all of the benefits of the proposed Merger.  For example, if either META Group’s or Gartner’srepresentations and warranties are not true and correct and, with someexceptions, the failure to be true and correct has a material adverse effect atthe closing, the other party may not be required to close.

 

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***Failure to complete the proposed Merger withGartner would negatively impact META’s future business and operations.***

 

If the plannedMerger with Gartner were not completed, we could suffer a number ofconsequences that may adversely affect our business, results of operations andstock price, including the following:

 

•                  We would notrealize the benefits we expect from becoming a part of a combined company withGartner, including the potentially enhanced financial and competitive position;

 

•                  Activitiesrelating to the Merger and related uncertainties may lead to a loss of revenueand market position that we may not be able to regain if the Merger does notoccur;

 

•                  The market priceof our common stock could decline following an announcement that the Merger hasbeen abandoned, to the extent that the current market price reflects a marketassumption that the Merger will be completed;

 

•                  We would remainliable for our costs related to the Merger, such as legal fees and a portion ofthe investment banking fees;

 

•                  We may not beable to continue our present level of operations and therefore would have toscale back our present level of business and consider additional reductions in force;and

 

•                  We may not beable to take advantage of alternative business opportunities or effectivelyrespond to competitive pressures.

 

In connectionwith the proposed Merger, we have filed a proxy statement with the SEC.  The proxy statement has been mailed to allholders of our stock and contains important information about us, Gartner andthe proposed Merger, risks relating to the Merger and the combined company, andrelated matters.  We urge all of ourstockholders to read the proxy statement.

 

***If We are Unable to Return to Profitability it CouldImpact Our Ability to Continue Our Operations***

 

Weexperienced a net loss of $2.2 million for 2004 and $4.3 millionfor 2003.  To return toprofitability, we will need to, among other things, achieve revenue growthand/or maintain operating expenses below revenue levels.  If we fail to either achieve revenue growthand/or maintain operating expenses below revenue levels, such a failure willlikely result in continued operating and/or net losses.  Operating and net losses over sustainedperiods of time could impact our ability to continue our operations.

 

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***Decreases and Delays in IT Spending Could Lead toFurther Decreases In Our Revenues and Increase Our NetLosses***

 

Ourbusiness depends on continued spending on IT by substantial commercial andgovernmental users of IT.  If, as aresult of general economic uncertainty or otherwise, IT users continue toreduce IT spending levels or delay their purchases of IT products and services,then such decreases or delays in spending could continue to reduce demand forour products and services, which could lead to further decreases in ourrevenues and increase our net losses.  The Company has seen reduced IT spendinglevels from its customers beginning in the latter half of 2000 and continuingto the present.  Additionally, we expectdecreases and delays in IT spending to continue to affect our business for theforeseeable future.

 

***We May Have to Change Our Product Pricing Strategy Dueto Competitive Pressures***

 

Ourpricing strategy may limit the potential market for our Advisory Services,Strategic Consulting services and Published Research products to substantialcommercial and governmental users and vendors of IT.  Pricing pressures have contributed to ourdecline in revenue as we have lost business to competitors offering similarproducts and services for a lesser price and, in certain circumstances, havelowered the selling price of certain of our products and services.  As a result, we may be required to change ourpricing strategy by reducing prices for our existing Advisory Services,Strategic Consulting services and Published Research products or to introducenew products and services with lower prices to expand or maintain our marketshare.  These actions present risksbecause the new products might not be accepted by our customers and/or ourrevenues could be reduced by lower prices.

 

***We Depend on Renewals of Subscription-Based Services, And Our Failure to Renew at Historical Rates Could Lead toFurther Decreases in Our Revenues and Increase Our Net Losses***

 

Wederived approximately63% and 64% of our total revenues during 2004 and 2003, respectively, fromsubscriptions to our Advisory Services.  Advisory Service subscriptions typically havea one year term.  We may not besuccessful in renewing the subscriptions of our customers at historical renewalrates.  Our ability to renewsubscriptions is subject to a number of risks, including the following:

 

•                                          Wemay be unsuccessful in delivering consistent, high-quality, and timely analysisand advice to our clients

 

•                                          Wemay not be able to hire or retain highly talented analysts in a verycompetitive job market

 

•                                          Wemay be unsuccessful in understanding and anticipating market trends and thechanging needs of our clients

 

•                                          Wemay not be able to deliver products and services of the quality and timelinessnecessary to withstand competition

 

•                                          Ourclients may continue to shift their demands to more consultative,solution-oriented products and services that take into account the client’sunique environment

 

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•                                          If weare unable to successfully maintain our subscription renewal rates, our annualrevenue may decrease.

 

***We Depend on Non-Recurring Strategic ConsultingEngagements, And Our Failure to Secure New EngagementsCould Lead to Further Decreases in Our Revenues and Increase Our Net Losses***

 

Wederived approximately31% and 29% of our total revenues during the years 2004 and 2003 from StrategicConsulting engagements.  StrategicConsulting engagements vary in number, size and scope, and typically areproject-based and non-recurring.  Ourability to replace completed Strategic Consulting engagements with newengagements is subject to a number of risks, including the following:

 

•                                          Wemay be unsuccessful in delivering consistent, high-quality and timelyconsulting services to our clients

 

•                                          Wemay not be able to hire or retain highly talented consultants in a verycompetitive job market

 

•                                          Wemay not be able to develop new business

 

•                                          Wemay not be able to maintain the costs of engagements within fixed feearrangements

 

•                                          Wemay be unsuccessful in understanding and anticipating market trends and thechanging needs of our clients

 

•                                          Theskills and competencies of our Strategic Consulting staff may not match theskills required for the fulfillment of existing or potential StrategicConsulting engagements

 

•                                          Wemay not be able to deliver consulting services of the quality and timelinessnecessary to withstand competition

 

•                                          Ifwe are not able to replace completed Strategic Consulting engagements with newengagements, our revenue may decrease.

 

***Our Results May Fluctuate Significantly On a QuarterlyBasis Which Could Affect the Price of our Common Stock***

 

Ouroperating results have varied significantly from quarter to quarter.  We expect future operating results tofluctuate due to several factors, many of which are not in our control,including the following:

 

•                                          Thedisproportionately large percentage of our Advisory Services subscriptions thatexpire in the fourth quarter of each year

 

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•              The level and timing of renewalsof subscriptions to our Advisory Services

 

•                                          Themix of Advisory Services revenues versus Strategic Consulting and PublishedResearch Products revenues

 

•                                          Thenumber, size and scope of Strategic Consulting engagements in which we areengaged, the degree of completion of such engagements and our ability to matchthe skills of our consulting staff to consulting engagement opportunities

 

•                                          Accuracyof estimates of resources required to complete ongoing Strategic Consultingengagements

 

•              The timing and amount of newbusiness generated by us

 

•              The mix of domestic versusinternational business

 

•              The performance of our acquiredinternational subsidiaries

 

•              The timing of the development,introduction, marketing and market acceptance of new products and services

 

•                                          Thetiming of the hiring of research analysts, consultants, and sales representatives

 

•              Effective use of our analysts andconsultants

 

•              Changes in the spending patternsof our clients

 

•              Our ability to collect ouraccounts and notes receivable

 

•              Changes in market demand for ITresearch and analysis

 

•              Our ability to increase our salesto our existing customers and find new customers

 

•              Decreases in spending on IT bysubstantial commercial and governmental users of IT

 

•              General economic uncertainty andeconomic slowdown in the U.S. and abroad

 

•              Competitive conditions in the industry,including pricing pressure.

 

Dueto these factors, we believe that period-to-period comparisons of operatingresults are not necessarily meaningful and should not be relied on as anindication of future operating results.  The potential fluctuations in our operatingresults make it likely that, in some future quarter, our operating results willbe below the expectations of securities analysts and investors, which couldlower the price of our common stock.

 

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***Our International Operations Expose Us to a Variety ofRisks Which Could Negatively Impact Our Future Revenue Growth and Profitability***

 

Netrevenues attributable to international clients represented approximately 32% and 24% of ourtotal Advisory Services revenues for 2004 and 2003, respectively.  We sell our products and servicesinternationally through a network of foreign subsidiaries and independent salesrepresentative organizations.  We assumesignificantly greater risks by selling through independent sales representativeorganizations than through a direct employee sales force or foreignsubsidiaries.  These risks include:

 

•              Failure by us to find distributorsfor our products and services

 

•              The financial health of eachforeign subsidiary and individual sales representative organization

 

•              The ability of individual salesrepresentative organizations to repay their liabilities to us

 

•              Developing and managingrelationships with sales representative organizations   and their employees

 

•                                          Failureby us to replace sales representative agreements on terms beneficial to us or on a timely basis and clients’ potentialunwillingness to continue to do business with us or our new distributor in theevent that any existing agreements with independent sales representativeorganizations are terminated

 

•              Integration of acquiredinternational operations into our existing operations

 

•              Greater difficulty in maintainingdirect client contact

 

•              Greater accounts receivablecollection risk (to the extent we rely on the sales representative organizationto invoice and collect receivables)

 

•              Longer accounts receivablecollection cycles.

 

Inaddition, our general risks of international operations include:

 

•                                          Political,social, legal and economic conditions in various jurisdictions.  Specifically, some countries in which weoperate may experience political or social turmoil and adverse economicconditions and have adopted significant, and sometimes restrictive, politicaland legal policies, measures and regulatory requirements affecting commerce.  These events and laws could, among otherthings, affect a country’s currency controls, cause fluctuations in foreigncurrency exchange rates or result in financial difficulties for ourinternational clients.  These effectscould, in turn, increase the costs of our products and services or cause someof our international clients to reduce their purchases of our products and

 

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services.  In addition, effective intellectual propertyprotection may not be available in all jurisdictions in which we offer orintend to offer our products and services

 

•              Tariffs and other trade barriers

 

•              Potentially adverse taxconsequences.

 

Weexpect that international operations will continue to account for a significantportion of our revenues and we intend to continue to expand our internationaloperations.  Expansion into newgeographic territories may require considerable management and financialresources, as was the case during the three years ended December 31, 2004,and may negatively impact our results of operations.  If we are unable to successfully manage therisks associated with international operations, such an inability could reduceour total revenues and profitability.

 

***We May Fail to Anticipate and Adapt to Market ChangesWhich Could Impair Our Ability To Remain CompetitiveAnd Harm Our Market Share***

 

Oursuccess depends in part on our ability to anticipate rapidly changingtechnologies and market trends, and to adapt our products and services to meetthe changing information and analysis needs of IT users.  Frequent and often dramatic changescharacterize the IT industry, including the following:

 

•              Introduction of new products andobsolescence of others

 

•              Shifting strategies and marketpositions of major industry participants

 

•              Paradigm shifts with respect tosystem architectures

 

•              Changing objectives andexpectations of IT users and vendors

 

•                                          Volatilityin spending levels on IT by substantial commercial and governmental users of IT.

 

Thisenvironment of rapid and continuous change presents significant challenges toour ability to provide our clients with current and timely analysis and adviceon issues of importance to them.  Wecommit substantial resources to meeting these challenges.  If we fail to provide insightful timelyanalysis of developments and assessment of technologies and trends in a mannerthat meets changing market needs, we may lose our customers to competitors whomay better anticipate changing technologies and market trends and provide moretimely analysis and advice.

 

***We May Not be Able to Attract and Retain QualifiedPersonnel Which Could Jeopardize the Quality of Our Research, ProductDevelopment, Selling, Marketing and Management***

 

Weneed to hire, train and retain qualified employees to execute our strategy andsupport growth.  In particular, we needtrained research analysts, consultants, sales representatives,

 

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productdevelopment staff, operations staff and management.  We continue to experience intense competitionin recruiting and retaining qualified employees.  The pool of experienced candidates is small,and we compete for qualified employees against many companies, includingGartner, Inc., that have substantially greater financial resources than we do.  If we are unable to successfully hire, retainand motivate a sufficient number of qualified employees, the quality of ourresearch, our product development efforts, our selling, marketing andmanagement could each be negatively impacted, which could have an adverseeffect on our business, results of operations and financial condition.

 

***We Have Many Competitors Who May be More Effective ThanUs Which Could Result in Pricing Pressure and Loss of Market Share***

 

TheIT research, analysis and consulting industry is extremely competitive.  We compete directly with other independentproviders of similar services and indirectly with the internal staffs ofcurrent and prospective client organizations.  Our principal direct competitor, Gartner,Inc., has a substantially longer operating history and has considerably greaterfinancial resources and market share than we do.  We also compete indirectly with largerelectronic and print media companies and consulting firms.  Our indirect competitors,many of which have substantially greater financial, information gathering andmarketing resources than we do, could choose to compete directly against us inthe future.

 

Ourmarket has few barriers to entry.  Newcompetitors could easily compete against us in one or more market segmentsaddressed by our Advisory Services or Strategic Consulting services.  Our current and future competitors may developproducts and services that are more effective than our products and services.  Competitors may also produce their productsand services at less cost and market them more effectively.  If we are unable to successfully competeagainst existing or new competitors, such an inability will have a materialadverse effect on our results of operations and would likely result in pricingpressure and loss of market share.

 

***We May Not Be Able to Develop or Acquire the NewProducts and Services That We Need to Remain Competitive***

 

Ourfuture success depends on our ability to develop or acquire new products andservices that address specific industry and business sectors, changes in clientrequirements and technological changes in the IT industry.  The process of internally researching,developing, launching and gaining client acceptance of a new product or serviceis inherently risky and costly.  Assimilating and marketing an acquired productor service is also risky and costly.  Inaddition, we have introduced few new products or services and have had limitedexperience in acquiring and integrating new products or services into ourbusiness.  If we are unable to developnew products and services, we may lose customers to competitors who may betterprovide updated products and services, which could lead to a decrease inrevenues and a loss of market share.

 

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***Our Investments Expose Us to Financial Risks WhichCould Result in Additional Impairment Losses***

 

Inan effort to develop new products and services, from April 1996 to December2000, we made investments in and advances to companies in parallel orsynergistic industries totaling approximately $21.5 million.  Such investments and advances are highly riskyand illiquid.  During 2004 and 2002, wedetermined that, based on reviews of the business climate of each company inwhich we had an investment, that company’s historical financial results,projected cash flow, plans for the future and likelihood of achieving suchplans and other available market data, several of our investments in thesecompanies were impaired.  Accordingly, werecorded $154 thousand and $1.1 million of impairment losses,respectively, on these investments. There can be no assurance that such investments will result in newproduct or service offerings for us or otherwise be successful.  Many factors outside our control, includinggeneral economic conditions, could impair the value of our investmentsrequiring us to record further, substantial losses related to such investments. Moreover, these investments may disruptour ongoing business and distract management.  Furthermore, there can be no assurance that wewill be able to liquidate our investments when needed or desirable.  If we are unable to manage our remaininginvestments, we may not be able to obtain any developments in new products andservices we wanted to obtain and we may be required to record furtherimpairment losses.

 

***If We Fail to Integrate Recent Acquisitions, We May NotRealize the Benefits Expected From Our Investments***

 

Aspart of our business strategy, we buy, or make investments in, complementarybusinesses, products and services.  If wefind a business that we wish to acquire, we may have difficulty negotiating theterms of the purchase, financing the purchase, and assimilating the employees,products and operations of the acquired business.  Acquisitions may disrupt our ongoing businessand distract our management.  Furthermore, acquisitions of new businessesmay not lead to the successful development of new products or services, or ifdeveloped, such products or services may not achieve market acceptance or proveto be profitable.  We may therefore paymore than the value we derive from the acquisition.  A given acquisition may also have a materialadverse effect on our financial condition or results of operations.  In addition, we may be required to incur debtor issue equity to pay for any future acquisitions or contingent payments inconnection with previously consummated acquisitions, which may be dilutive toour current stockholders and/or decrease our working capital.

 

***Our Stock Price is Volatile Which Could Result In Investors Losing Some Or All Of Their Investment***

 

Themarket price of our common stock has been volatile.  During 2002, as reported on the NASDAQNational Market, the market price of our common stock reached a low of $1.20and a high of $3.41.  In 2003, the marketprice of our common stock reached a low of $2.05 and a high of $6.34.  In 2004, the market price of our common stockreached a low of $3.01 and a high of $9.89.  The market price of our common stock could besubject to wide fluctuations in response to:

 

•              Our perceived prospects, includinganticipated revenue growth

 

•              Variations in our operatingresults and our achievement of key business targets

 

•              Our ability to maintain operatingexpenses below revenue levels

 

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•              Changes in securities analysts’recommendations or earnings estimates

 

•                                          Differencesbetween our reported results and those expected by investors and securitiesanalysts

 

•              Announcements of new serviceofferings by us or our competitors

 

•                                          Marketreaction to any acquisitions, joint ventures or strategic investments announcedby us or our competitors

 

•                                          Generaleconomic or stock market conditions unrelated to our operating performance.

 

•                                          Ourability to complete the proposed Merger with Gartner.

 

Inthe past, following periods of volatility in the market price of theirsecurities, many companies have been the subject of securities class actionlitigation.  If we were sued in asecurities class action, it would result in substantial costs as well as adiversion of our management’s attention and resources, and it would likelycause the market price of our common stock to fall.

 

***Political And Social Turmoil Could Make It DifficultFor Us And Our Customers To Accurately Forecast And Plan Future BusinessActivities And Could Negatively Impact Our Business.***

 

Increasing political and social turmoil, suchas military actions and terrorist activities, can be expected to put furtherpressure on economic conditions in the United States and foreign jurisdictionsand are placing pressure on our business operations.  For example, certain of our conference eventsin various geographies, such as the Middle East, were postponed in light ofpotential ongoing military action in the region.  Additionally, as a result of military actionand terrorist activities, we have issued to our employees cautionary advicewith respect to their travel.  Theseconditions make it difficult for us and our customers to accurately forecastand plan future business activities and may delay our development plans and oursales, particularly in the geographically affected areas.

 

**ITEM 7A.****                                QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

*Interest Rate Risk*

 

In 2004, the Company’sexposure to market risk for changes in interest rates related primarily toborrowings under its $6 million credit facility.  In March 2003, the Company executed a new $6million credit agreement with its bank (the “Amended Facility”).  The Company borrowed and repaid $9 millionunder this facility during 2004, and has no borrowing outstanding under thisfacility as of December 31, 2004.  Underthe Amended Facility, interest on any outstanding

 

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borrowingswill be payable at the rate of LIBOR (as determined by the bank) plus 1.5% orthe higher of (a) the Prime Rate or (b) the Federal Funds Rate plus 0.5%.  The Amended Facility contains no financialcovenants, and matured in November 2004.  The Company executed a five-month extension ofits Amended Facility effective as of November 4, 2004, which will extend thematurity date to April 4, 2005.  TheCompany believes that an increase or a decrease of ten percent in the effectiveinterest rate on available borrowings on its facility, if fully utilized, wouldnot have a material effect on future results of operations.

 

*InvestmentRisk*

 

The Company is exposed tomarket risk as it relates to changes in the market value of its investments.  The Company made investments in and advancesto companies in parallel or synergistic industries to that of the Company’s.  During 2004 and 2002, the Company recorded$154 thousand and $1.1 million, respectively, in impairment losses on itsinvestments and advances.  During 2003,the Company did not record any impairment loss on its investments and advances. As of December 31, 2004, the Company hadinvestments and advances totaling $1.0 million.  Adverse changes in market conditions and pooroperating results of the underlying investments may result in the Companyincurring additional losses or an inability to recover the remaining value ofits investments and advances.

 

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*Foreign CurrencyExchange Risk*

 

The Company is exposed to market risk as itrelates to foreign currency exchange rates.  Revenues and expenses in foreign currenciestranslate into higher or lower revenues and expenses in U.S. dollars as theU.S. dollar weakens or strengthens against foreign currencies.  Changes in foreign currency exchange rates maytherefore negatively affect the Company’s consolidated revenues and expenses,and net investment in foreign subsidiaries.  Currency transaction gains or losses arisingfrom transactions in currencies other than the functional currency of theCompany’s foreign subsidiaries are included in the results of operations.  Such gains and losses were not material to theCompany’s consolidated results of operations during 2004 and 2003.  The Company believes that an increase or adecrease of ten percent in foreign currency exchange rates would not have amaterial effect on future results of operations.  The Company has not entered into foreigncurrency forward exchange contracts or other derivative financial instrumentsto hedge the effects of adverse fluctuations in foreign currency exchangerates.

 

**ITEM 8.****             FINANCIAL STATEMENTSAND SUPPLEMENTARY DATA**

 

The consolidated financial statements andfinancial statement schedule listed under Item 15 — Exhibits, FinancialStatement Schedules, and Reports on Form 8-K are filed as a part of thisItem 8.  Supplementary financialinformation may be found in Note 13 to the consolidated financial statements.

 

**ITEM 9.****             CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A.****          CONTROLS AND PROCEDURES**

 

In accordance with Rule 13a-15(b) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), the Companycarried out an evaluation, under the supervision and with the participation ofthe Company’s management, including the Company’s President and Chief OperatingOfficer along with its Vice President and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as defined in Rule 13a-14(c) under the Exchange Act).  Based upon their evaluation of thesedisclosure controls and procedures, the Company’s President and Chief OperatingOfficer along with the Vice President and Chief Financial Officer concluded, asof the end of the period covered by the report, that the Company’s disclosurecontrols and procedures are effective to ensure that information required to bedisclosed by us in reports we file under the Exchange Act is recorded,processed, summarized and reported by management of the Company on a timelybasis in order to comply with the Company’s disclosure obligations under theExchange Act and the SEC rules thereunder.

 

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## *Changesin Internal Controls*

## * *

Therehave been no significant changes in the Company’s internal controls or otherfactors that could significantly affect internal controls subsequent to thedate the Company carried out this evaluation, including any corrective actionswith regard to significant deficiencies and material weaknesses.

 

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**PART III**

 

**Item10.**                            Directors and Executive Officers of the Registrant.

** **

Thereare no family relationships among any of the directors or executive officers ofthe Company.

 

**Directors**

 

Thenames of our directors, their ages, and certain other information about them asof March 21, 2005 are set forth below:

 
| **Name**             | ** ** | **Age** | ** ** | **Director Since** |
|----------------------|------------|---------|------------|--------------------|
| Dale  Kutnick        |       | 55      |       | 1989               |
| Gayl  W. Doster      |       | 67      |       | 2000               |
| Harry  S. Gruner     |       | 45      |       | 1994               |
| Francis  J. Saldutti |       | 57      |       | 1990               |
| Michael  Simmons     |       | 66      |       | 1994               |

 

Messrs. Doster,Saldutti and Simmons comprise the Audit Committee of the Board.  Messrs. Gruner and Simmons comprise theCompensation Committee of the Board. Messrs. Saldutti and Simmons comprise the Nominating Committee ofthe Board.

 

**Dale Kutnick**, a co-founder of theCorporation, has served as a director of the Corporation since its inception inJanuary 1989, and as Chairman of the Board of Directors of the Corporationsince May 1998.  Mr. Kutnickserved as Chief Executive Officer from January 1989 to July 2002, andas Acting President of the Corporation from April to July 2002.  In addition, Mr. Kutnick served asResearch Director from the inception of the Corporation in January 1989 toJune 1998 and served as Co-Research Director from July 1998 toJanuary 2003.  Prior to co-foundingMETA Group, Mr. Kutnick was Executive Vice President of Research atGartner, Inc. and an Executive Vice President at Gartner Securities.  Prior to his experience at Gartner, Inc.,he served as an Executive Director, Research Director and Principal at YankeeGroup and as a Principal at Battery Ventures, a venture capital firm.  Mr. Kutnick is a graduate of YaleUniversity.  Mr. Kutnick serves onthe Board of Directors of First Albany Companies, Inc., the holdingcompany of First Albany Corporation.

** **

**Gayl W. Doster** has served as a Directorof the Corporation since April 2000.  Mr. Doster is a CPA and was the Presidentand Chief Operating Officer of Sigma Micro Corporation, a computer softwarecompany from January 1997 until his retirement in December 2002.Previously, Mr. Doster served as Professor of Community PharmacyManagement, College of

 

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**Pharmacy, University of Rhode Island from October 1995to January 1997. Mr. Doster received a BS in Accounting from theIndiana University Kelley School of Business and earned his CPA in 1965 whileworking at Ernst & Young.**

** **

**Harry S. Gruner** has served as a Directorof the Corporation since July 1994. Mr. Gruner has been a generalpartner of JMI Partners, L.P., the general partner of JMI Equity Fund, L.P.,and an affiliate of JMI Associates, a venture capital firm, since 1992. From1986 until joining JMI Equity Fund, L.P., Mr. Gruner was at AlexBrown & Sons Incorporated, an investment banking firm.

** **

**Francis J.Saldutti** has served as a Director of the Corporation since November 1990.Mr. Saldutti has been a general partner of Ardent Research Partners, L.P., a technology focused money management partnership, sinceApril 1992 and was a senior technology analyst at Amerindo InvestmentAdvisors, an investment firm, from October 1989 throughFebruary 1995. Prior to October 1989, Mr. Saldutti was SeniorVice President and Director of Research for Gartner Securities, Director ofTechnology Research for LF Rothschild, Unterberg, Towbin, an investment bankingfirm, and senior technology analyst for Merrill Lynch Asset Management’sScience/Technology Fund.

** **

**Michael Simmons** has served as a Directorof the Corporation since September 1994. Mr. Simmons serves asPrincipal and President of M.S. Associates, a technology management andoperations consulting firm founded by him in October 1993.Mr. Simmons also served as the Chief Administrative Officer of SecurityCapital Group, a real estate investment firm, from June 1995 toMarch 1997. In 1993 and 1994, Mr. Simmons worked as an independentmanagement consultant, and from 1990 through 1993, Mr. Simmons was anExecutive Vice President at the Bank of Boston.

** **

**Executive Officers of theCompany**

** **

Thenames of our executive officers, their ages and certain other information aboutthem as of March 21, 2005 are set forth below:

 
| **Name**    | ** ** | **Age** | ** ** | **Position**                                                      |
|-------------|------------|---------|------------|-------------------------------------------------------------------|
| CD  Hobbs   |       | 61      |       | President,  Chief Operating Officer                               |
| John  Riley |       | 46      |       | Vice  President, Chief Financial Officer, Treasurer and Secretary |

 

**Executive officers serve at the discretion of theBoard of Directors.**

** **

**CD Hobbs** has served as Presidentand Chief Operating Officer since October 2004.  Mr. Hobbs joined META Group in 1996 to launchEnergy Information Strategies and later ran all vertical industry and executiveservices.  He was an officer of META during that tenure,

 

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**departing** in 2000 to serve asChairman and CEO of the San Francisco based global software company SPLWorldGroup, Inc.  Mr. Hobbs rejoined META in 2003 and worked in ExecutiveDirections.

** **

**John W. Riley** has served as VicePresident, Chief Financial Officer, Treasurer and Secretary sinceFebruary 2004. Previously, Mr. Riley held the position of VicePresident and Controller from February 2003 to January 2004. Prior tojoining the Corporation he served as Vice President of Finance for CovanceCentral Laboratory Services, Inc. from August 1999 to April 2002;as Director of Finance and Treasurer for Novo Nordisk of NorthAmerica, Inc. from February 1996 to July 1999; and as Controllerfor Novo Nordisk Pharmaceuticals Inc. from August 1992 toJanuary 1996. He earned his CPA while working at Price Waterhouse.Mr. Riley received a Bachelors in BusinessAdministration (Accounting) from the University of Notre Dame.

** **

**Stockholder Proposals**

 

METAwill hold a 2005 annual meeting of stockholders only if its proposedacquisition by Gartner, Inc. announced on December 27, 2004 is not completed.

 

METAhas not made any material changes to the procedures by which security holderscan recommend proposals to the META Board of Directors.

 

**Code of Ethics**

 

TheCompany has adopted the Code of Ethics for Financial Managers which applies tothe Chief Executive Officer and the Chief Financial Officer, who are theprincipal accounting officers (collectively, the “Finance Managers”). This Codeof Ethics is included as an exhibit to this Form 10-K. If any substantiveamendments are made to the Code of Ethics or the Board of Directors grants anywaiver, including any implicit waiver, from a provision of the code to any ofthe directors or officers of the Company, The Company will disclose the natureof such amendment or waiver in a report on Form 8-K.

 

**Audit Committee**

 

TheCompany has a separately designated standing Audit Committee established inaccordance with Section 3(a)(58)(A) of theExchange Act. The current members of the Audit Committee are Gayl Doster,Francis Saldutti and Michael Simmons.

 

**Audit Committee Financial Expert**

 

TheCompany’s Board of Directors has determined that Mr. Doster is the Company’sAudit Committee Financial Expert, as defined in applicable SEC rules.Mr. Doster is independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.

 

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**Section 16(a) Beneficial OwnershipReporting Compliance**

 

Section 16(a)of the Securities Exchange Act of 1934 requires the Company’s officers anddirectors, and holders of more than ten percent of a registered class of theCompany’s equity securities, to file reports of ownership of such securitieswith the Securities and Exchange Commission. Officers, directors and greaterthen ten percent beneficial owners are required by applicable regulations tofurnish the Company with copies of all Section 16(a) forms they file.

 

Basedon a review of the copies of Forms 3, 4 and 5 furnished to the Company,the Company believes that all Section 16(a) filing requirements applicableto its officers, directors and ten percent holders were complied within atimely manner during fiscal year 2004.

 

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**Item11.**                            Executive Compensation.

** **

**The following table presents compensation paid bythe Company for services rendered during fiscal years ended December 31,2004, 2003 and 2002 for (i) all persons serving as the Company’s ChiefExecutive Officer during the year ended December 31, 2004, (ii) themost highly compensated executive officers (other than the Chief ExecutiveOfficer) serving at the end of the last fiscal year whose salary plus bonusexceeded $100,000 in fiscal 2004 and (iii) two**former executive officerswho would have been included in the category described in subsection(ii) had they still been executive officers of the Company at the end offiscal 2004 (the group of individuals is collectively referred to hereinafteras the “Named Executive Officers”).

 

###### **SUMMARY COMPENSATION TABLE (1)**

 
| ** **                              | ** ** | ** ** | ** ** | ** **              | ** ** | **Long-Term Compensation/Awards** | ** ** | ** **       | ** ** |
|-----------------------------------------|------------|------------|------------|-------------------------|------------|-----------------------------------|------------|------------------|------------|
| ** **                              | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Restricted**                    | ** ** | **Securities**   | ** ** | ** ** | ** ** |
| ** **                              | ** ** | ** ** | ** ** | ** **              | ** ** | ** **                        | ** ** | **Other Annual** | ** ** | **Stock** | ** ** | **Underlying** | ** ** | **All Other** | ** ** |
| **Name and Principal Position**         | ** ** | **Year**   | ** ** | **Salary ($)**          | ** ** | **Bonus ($)**                     | ** ** | **Compensation** | ** ** | **Awards ($)** | ** ** | **Options** | ** ** | **Compensation** | ** ** |
| ** **                              | ** ** | ** ** | ** ** | ** **              | ** ** | ** **                        | ** ** | **($)**          | ** ** | ** ** | ** ** | **(# of shares)** | ** ** | **($) (2)** | ** ** |
|                                    |       |       |       |                    |       |                              |       |             |       |   |   |   |   |   |   |
| CD Hobbs (3) (4) (5)                    |       | 2004       |       | $                       | 214,786    |                              | $          | 21,571           |       | $ | 85,658 |   | $ | 235,000 |   | 2,500 |   | — |   |
| President and Chief                     |       | 2003       |       | $                       | 47,505     |                              | —     |             | —     |   | — |   | 20,000 |   | — |   |
| Operating Officer                       |       | 2002       |       | —                  |       | —                            |       | —           |       | — |   | — |   | — |   |
|                                    |       |       |       |                    |       |                              |       |             |       |   |   |   |   |   |   |
| Herbert L. VanHook (6)                  |       | 2004       |       | $                       | 212,064    |                              | $          | 38,000           |       | — |   | — |   | 25,000 |   | $ | 96,154 |   |
| Former Chief Operating                  |       | 2003       |       | $                       | 225,000    |                              | $          | 29,000           |       | — |   | — |   | — |   | — |   |
| Officer                                 |       | 2002       |       | $                       | 202,269    |                              | $          | 68,584           |       | — |   | — |   | 26,000 |   | — |   |
|                                    |       |       |       |                    |       |                              |       |             |       |   |   |   |   |   |   |
| Alfred J. Amoroso (7)                   |       | 2004       |       | $                       | 278,383    |                              | $          | 233,333          |       | — |   | — |   | — |   | $ | 107,692 |   |
| Former Vice Chairman                    |       | 2003       |       | $                       | 403,981    |                              | $          | 233,333          |       | — |   | — |   | 125,000 |   | — |   |
| of the Board of Directors,              |       | 2002       |       | $                       | 246,776    |                              | $          | 166,668          |       | — |   | — |   | 500,000 |   | — |   |
| President  and Chief  Executive Officer |       |       |       |                    |       |                              |       |             |       |   |   |   |   |   |   |
|                                    |       |       |       |                    |       |                              |       |             |       |   |   |   |   |   |   |
| John Riley                              |       | 2004       |       | $                       | 188,993    |                              | $          | 18,000           |       | — |   | — |   | 10,000 |   | — |   |
| Vice President                          |       | 2003       |       | $                       | 165,175    |                              | —     |             | —     |   | — |   | 3,600 |   | — |   |
| Chief Financial Officer,                |       | 2002       |       | —                  |       | —                            |       | —           |       | — |   | — |   | — |   |
| Secretary and Treasurer                 |       |       |       |                    |       |                              |       |             |       |   |   |   |   |   |   |
|                                    |       |       |       |                    |       |                              |       |             |       |   |   |   |   |   |   |
| John Daut (8)                           |       | 2004       |       | $                       | 245,940    |                              | $          | 7,000            |       | — |   | — |   | 15,000 |   | — |   |
| Senior Vice President,                  |       | 2003       |       | $                       | 89,914     |                              | —     |             | —     |   | — |   | 25,000 |   | — |   |
| Global Sales                            |       | 2002       |       | —                  |       | —                            |       | —           |       | — |   | — |   | — |   |
|                                    |       |       |       |                    |       |                              |       |             |       |   |   |   |   |   |   |
| Howard A. Rubin                         |       | 2004       |       | $                       | 240,000    |                              | $          | 26,955           |       | — |   | — |   | — |   | — |   |
| META Fellow                             |       | 2003       |       | $                       | 240,000    |                              | $          | 26,955           |       | — |   | — |   | — |   | — |   |
|                                    |       | 2002       |       | $                       | 240,000    |                              | —     |             | —     |   | — |   | — |   | $ | 3,370 |   |
|                                    |       |       |       |                    |       |                              |       |             |       |   |   |   |   |   |   |
| David H. Yockelson                      |       | 2004       |       | $                       | 210,419    |                              | $          | 45,289           |       | — |   | — |   | — |   | — |   |
| Senior Vice President and               |       | 2003       |       | $                       | 220,000    |                              | $          | 24,500           |       | — |   | — |   | — |   | — |   |
| Research Lead                           |       | 2002       |       | $                       | 205,135    |                              | $          | 11,500           |       | — |   | — |   | 27,375 |   | — |   |
|                                         |            |            |            |                         |            |                                   |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)                                  The compensationdescribed in this table does not include medical, group life insurance or otherbenefits received by the Named Executive Officers which are available generallyto all salaried employees of the Corporation and certain perquisites and otherpersonal benefits, securities or property received by the Named ExecutiveOfficers that do not exceed the lesser of $50,000 or 10% of any such officer’saggregate salary and bonus disclosed in this table.

 

(2)                                  Consists of severancepayments for Mr. Amoroso and Mr. VanHook. Mr. Rubin’s other compensation consists of premiums for term life insurancepaid by the Company for Mr. Rubin’s benefit.

 

(3)           Mr. Hobbs wasappointed President and Chief Operating Officer on October 18, 2004.

 

(4)           Mr. Hobbs' Annual OtherCompensation consists of a tax gross-up paid on the 50,000 share stock award.

 

(5)           Mr. Hobbs received astock grant of 50,000 META Group shares at a fair market value of $4.70 pershare.

 

(6)           Mr. VanHook left the Company inOctober 2004.

 

(7)           Mr. Amoroso left the Company in June2004.

 

(8)           Mr. Daut left the Company in February2005.

 

**Option Grants in 2004**

 

TheCompany’s 2004 Stock Plan and Second Amended and Restated 1995 Stock Planprovide for the grant of options to executive officers of the Company.  Options granted to Named Executive Officersunder the Plans were incentive stock options to the extent allowable underSection 422 of the Internal Revenue Code and were otherwise nonstatutorystock options. The options were granted at a price equal to the fair marketvalue of the Company’s common stock on the date of grant. Such options typicallyexpire ten years from the date of grant. The following table presents stockoption grants made during 2004 to the Named Executive Officers.

 
| ** **         | ** ** | **Individual  Grants** | ** ** | ** **           | ** ** | ** **    | ** ** | ** **     | ** ** |
|--------------------|------------|------------------------|------------|----------------------|------------|---------------|------------|----------------|------------|
| ** **         | ** ** | ** **             | ** ** | **% of  Total** | ** ** | ** **    | ** ** | ** **     | ** ** | **Potential  Realizable** | ** ** |
| ** **         | ** ** | **Number of**     | ** ** | **Options**          | ** ** | ** **    | ** ** | ** **     | ** ** | **Value at  Assumed** | ** ** |
| ** **         | ** ** | **Securities**         | ** ** | **Granted  to**      | ** ** | ** **    | ** ** | ** **     | ** ** | **Annual  Rates of** | ** ** |
| ** **         | ** ** | **Underlying**         | ** ** | **Employees**        | ** ** | ** **    | ** ** | ** **     | ** ** | **Stock Price  Appreciation** | ** ** |
| ** **         | ** ** | **Options**            | ** ** | **in  Fiscal**       | ** ** | **Exercise**  | ** ** | **Expiration** | ** ** | **for  Option Term(1)** | ** ** |
| **Name**           | ** ** | **Granted  (2)**       | ** ** | **Year**             | ** ** | **Price**     | ** ** | **Date**       | ** ** | **5%****($)** | ** ** | **10%****($ ****)** | ** ** |
|               |       |                   |       |                 |       | **($/Share)** |       |           |       |   |   |   |   |
|               |       |                   |       |                 |       |          |       |           |       |   |   |   |   |
| CD Hobbs           |       | 2,500                  |       | 0.38                 | %          | $             | 5.20       |           | 5/07/14    |   | $ | 8,176 |   | $ | 20,719 |   |
| Herbert L. VanHook |       | 25,000                 |       | 3.75                 | %          | $             | 5.36       |           | 02/23/14   |   | $ | 84,272 |   | $ | 213,561 |   |
| Alfred J. Amoroso  |       | —                 |       | —               |       | —        |       | —         |       | — |   | — |   |
| John Riley         |       | 10,000                 |       | 1.50                 | %          | $             | 5.20       |           | 05/07/14   |   | $ | 32,703 |   | $ | 82,875 |   |
| John Daut          |       | 15,000                 |       | 2.25                 | %          | $             | 5.20       |           | 05/07/14   |   | $ | 49,054 |   | $ | 124,312 |   |
| Howard A. Rubin    |       | —                 |       | —               |       | —        |       | —         |       | — |   | — |   |
| David H. Yockelson |       | —                 |       | —               |       | —        |       | —         |       | — |   | — |   |

 

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(1)                                  Amounts reported inthese columns represent amounts that may be realized upon exercise of theoptions immediately prior to the expiration of their term assuming thespecified compounded rates of appreciation (5% and 10%) on the market value ofthe Common Stock over the term of the options. These numbers are calculated based on rules promulgated by theSecurities and Exchange Commission and do not reflect the Corporation’sestimate of future stock price growth. Actual gains, if any, on stock option exercises and Common Stockholdings are dependent on the timing of such exercises and the futureperformance of the Common Stock.  Therecan be no assurance that the rates of appreciation assumed in this table can beachieved or that the amounts reflected will be received by the individuals.

 

(2)**                                 **Timevesting options that vest one-fourth each year on the anniversary date ofgrant.

 

**Aggregated Option Exercises in 2004 andDecember 31, 2004 Option Values**

 

Thefollowing table presents information on stock options exercised during 2004 andthe value of all stock options held on December 31, 2004 by the NamedExecutive Officers.

 
| **Name**           | ** ** | **Shares Acquired on  Exercise (#)** | ** ** | **Value Realized ($) (1)** | ** ** | **Number of Shares  Underlying Unexercised  Options at Year-End  Exercisable/Unexercisable** | ** **      | **Value of Unexercised In-the  Money Options at Year-End  ($)(2)  Exercisable/Unexercisable** | ** ** |
|--------------------|------------|--------------------------------------|------------|----------------------------|------------|----------------------------------------------------------------------------------------------|-----------------|-----------------------------------------------------------------------------------------------|------------|
| CD Hobbs           |       | —                               |       | —                     |       |                                                                                         | 5,000 / 17,500  |                                                                                          |       | $23,200 / $81,075 |   |
| Herbert L. VanHook |       | 16,500                               |       | $                          | 60,575     |                                                                                         |            | 19,860 / —                                                                               |       |   | $53,918 / — |   |
| Alfred J. Amoroso  |       | 375,000                              |       | $                          | 1,951,636  |                                                                                         |            | —/—                                                                                 |       |   | —/— |   |
| John Riley         |       | —                               |       | —                     |       |                                                                                         | 900 / 12,700    |                                                                                          |       | $5,211 /$61,533 |   |
| John Daut          |       | —                               |       | —                     |       |                                                                                         | 6,250 / 33,750  |                                                                                          |       | $36,938 / $179,663 |   |
| Howard A. Rubin    |       | —                               |       | —                     |       |                                                                                         | 71,000 / 29,000 |                                                                                          |       | $16,117 / $6,583 |   |
| David H. Yockelson |       | —                               |       | —                     |       |                                                                                         | 23,250 / 16,030 |                                                                                          |       | $0 / $16,030 |   |

** **

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(1)          Value is based on the difference between theoption exercise price and the fair market value at the date of exercise,multiplied by the number of shares underlying the options.

 

(2)          Value is based on the difference between theoption exercise price and the fair market value at December 31, 2004, thefiscal year-end ($9.79 per share), multiplied by the number of sharesunderlying the options.

 

**Director Compensation**

** **

In 2004, the non-employee members of the Board of Directors werecompensated as follows: (i) an annual retainer of $12,000; (ii) anannual retainer of $15,000 for the Chairman of the Audit Committee (in additionto the retainer paid pursuant to (i) above); (iii) an annual retainerof $10,000 for Audit Committee members other than the Chairman of the Committee(in addition to the retainer paid pursuant to (i) above); (iv) astipend of $1,000 per in-person Board meeting; (v) a stipend of $500 perin-person Compensation Committee meeting; (vi) a stipend of $500 perin-person Nominating Committee meeting; and (vii) a stipend of $350 foreach telephonic board meeting (beyond five in a given quarter), where suchmeeting lasts longer than

 

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**75 minutes. No payments were made pursuant to(vii) above. In addition to the foregoing, Mr. Kutnick was paid$30,500 in fees and expenses by the Corporation for speaking at various ITprograms sponsored by the Corporation.**

 

**Additionally, in November 2004, the Board ofDirectors approved special compensation arrangements for certain members of theBoard:**Mr. Doster will bepaid a one-time stipend of $15,000 for his service as the Board representativeto the Operations Committee, and each of Messrs. Doster, Saldutti and Simmonswill be paid a one-time stipend of $20,000 for their service on the SpecialCommittee of the Board engaging in evaluation of strategic alternatives for theCompany.

 

**Item 12.**                 Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters.

 

**SECURITIESOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The following table shows the common stockbeneficially owned by (i) each person who is known by us to beneficially own 5%or more of our outstanding common stock, (ii) each of the executive officers ofMETA, (iii) each of the directors of META and (iv) all officers and directorsof META as a group, as of February 10, 2005. Except as otherwise noted, theaddress of each person listed in the table is c/o META Group, Inc., 208 HarborDrive, Stamford, CT 06912-0061.

 
| **Name and Address**                                          | ** ** | **Amount and Nature of   Beneficial Ownership(1)** | ** ** | **Percent of   Common Stock(2)** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------|------------|
| JMI Equity Fund  IV, L.P. and Affiliates                      |       | 851,712                                            | (3)(4)(5)  | 5.6                              | %          |
| c/o JMI Equity  Fund                                          |       |                                               |       |                             |       |
| 1119 St. Paul  Street                                         |       |                                               |       |                             |       |
| Baltimore, MD  21202                                          |       |                                               |       |                             |       |
| T. Rowe Price  Associates, Inc                                |       | 1,036,000                                          | (6)        | 6.8                              | %          |
| 100 East Pratt  Street                                        |       |                                               |       |                             |       |
| Baltimore, MD  21202                                          |       |                                               |       |                             |       |
| Water Island Capital LLC                                      |       | 840,112                                            | (6)(7)     | 5.5                              | %          |
| 650 Fifth  Avenue, 6th Floor                                  |       |                                               |       |                             |       |
| New York, NY  10019                                           |       |                                               |       |                             |       |
| CD Hobbs                                                      |       | 55,000                                             | (8)        |                             | *          |
| Herbert L.  VanHook                                           |       | —                                             |       |                             | *     |
| Alfred J.  Amoroso                                            |       | —                                             |       |                             | *     |
| John Riley                                                    |       | 1,800                                              | (9)        |                             | *     |
| John Daut                                                     |       | 14,750                                             | (10)       |                             | *     |
| Howard A. Rubin                                               |       | 176,000                                            | (14)       | 1.2                              | %          |
| David H.  Yockelson                                           |       | 24,000                                             | (15)       |                             | *          |
| Dale Kutnick                                                  |       | 1,997,165                                          | (11)       | 13.1                             | %          |
| Gayl W. Doster                                                |       | 49,500                                             |       |                             | *     |
| Harry S. Gruner                                               |       | 797,638                                            | (3)(4)     | 5.2                              | %          |
| c/o JMI Equity  Fund                                          |       |                                               |       |                             |       |
| 1119 St. Paul  Street                                         |       |                                               |       |                             |       |
| Baltimore, MD  21202                                          |       |                                               |       |                             |       |
| Francis J.  Saldutti                                          |       | 143,843                                            | (12)       |                             | *          |
| c/o Ardent  Research Partners, L.P.                           |       |                                               |       |                             |       |
| 153 E. 53rd Street                                            |       |                                               |       |                             |       |
| Suite 4800                                                    |       |                                               |       |                             |       |
| New York, NY  10022                                           |       |                                               |       |                             |       |
| Michael Simmons                                               |       | 110,000                                            | (13)       |                             | *          |
| c/o M.S.  Associates                                          |       |                                               |       |                             |       |
| P.O. Box 511538                                               |       |                                               |       |                             |       |
| Punta Gorda, FL  33951-1538                                   |       |                                               |       |                             |       |
| All directors  and executive officers as a group (16 persons) |       | 3,369,696                                          | (16)       | 21.6                             | %          |

 

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*              Less than 1%.

 

(1)       Beneficial ownership isdetermined in accordance with SEC rules. In computing the number of sharesbeneficially owned by a person, we have included shares for which the namedperson has sole or shared power over voting or investment decisions. The numberof shares beneficially owned includes common stock which the named person hasthe right to acquire, through conversion, option or warrant exercise, orotherwise, within 60 days after February 10, 2005.

 

(2)       Percentage of beneficialownership is based on 15,289,527 shares outstanding as of February 10, 2005.For each named person, the percentage ownership includes stock which the personhas the right to acquire within 60 days after February 10, 2005, as describedin Footnote 1. However, such shares shall not be deemed outstanding withrespect to the calculation of ownership percentage for any other person.

 

(3)       Includes 18,214 sharesbeneficially owned by Mr. Gruner, as to which he has sole voting and soledispositive power, and 60,000 shares issuable upon exercise of optionsexercisable within 60 days of December 31, 2004 that are held by Harry S.Gruner.

 

(4)       Information included inthis table regarding JMI Equity Fund IV, L.P. and its affiliates was obtainedfrom Mr. Gruner and JMI Associates IV, L.L.C.  JMI Equity Fund IV, L.P. is the beneficial owner of 505,421 shares ofCommon Stock.  JMI Euro Equity Fund IV,L.P. is the beneficial owner of 161,389 shares. JMI Equity Fund IV (AI), L.P. is the beneficial owner of 40,024shares.  JMI Associates IV, L.L.C. is thegeneral partner of JMI Equity Fund IV, L.P., JMI Euro Equity Fund IV, L.P. andJMI Equity Fund IV (AI), L.P. and may be deemed the beneficial owner of theshares held by such entities.  As such,JMI Associates IV, L.L.C. may be deemed the beneficial owner of 706,834shares.  Mr. Gruner, Charles E. NoellIII, Paul V. Barber, Bradford D. Woloson, Peter C. Arrowsmith and Robert F.Smith are managing members of JMI Associates IV, L.L.C. and may be deemed thebeneficial owners of the shares beneficially owned by JMI Associates IV,L.L.C.  As such, Messrs. Gruner, Noell,Barber, Woloson, Arrowsmith and Smith may be deemed the beneficial owners ofthe 706,834 shares beneficially owned by JMI Associates IV, L.L.C.  Messrs. Gruner, Noell, Barber, Woloson,Arrowsmith and Smith disclaim beneficial ownership of the shares beneficiallyowned by JMI Associates IV, L.L.C., JMI Equity Fund IV, L.P., JMI Euro EquityFund IV, L.P. and JMI Equity Fund IV (AI), L.P., except to the extent of theirrespective pecuniary interests therein.

 

(5)       Information included inthis table regarding JMI Equity Side Fund, L.P. was obtained from Mr. Grunerand JMI Equity Side Fund, L.P.  JMIEquity Side Fund, L.P. is the beneficial owner of 12,590 shares.  JMI Side Associates, L.L.C. is the generalpartner of JMI Equity Side Fund, L.P. and may be deemed the beneficial owner ofthe shares held by JMI Equity Side Fund, L.P. As such, JMI Side Associates, L.L.C. may be deemed the beneficial ownerof 12,590 shares.  Messrs. Noell, Barberand Woloson are officers of JMI Side Associates, L.L.C. and may be deemed thebeneficial owners of the shares beneficially owned by JMI Side Associates,L.L.C.  As such, Messrs. Noell, Barberand Woloson may be deemed the beneficial owners of the 12,590 sharesbeneficially owned by JMI Side Associates, L.L.C.  Messrs. Noell, Barber and Woloson disclaimbeneficial ownership of the shares beneficially owned by JMI Side Associates,L.L.C. and JMI Equity Side Fund, L.P., except to the extent of their respectivepecuniary interests therein.

 

Also includes 52,024shares beneficially owned by Mr. Noell, as to which he has sole voting and soledispositive power; 218,215 shares beneficially owned by Mr. Noell, as to whichhe has shared voting and shared dispositive power and as to which Mr. Noelldisclaims beneficial ownership; and 2,050 shares beneficially owned by Mr.Woloson, as to which he has sole voting and sole dispositive power.

 

(6)       Unless otherwise stated,beneficial ownership calculations for 5% stockholders are based solely onpublicly-filed Schedule 13D’s, 13F’s, or 13G’s, which 5% stockholders arerequired to file with the SEC.

 

(7)       Information included inthis table regarding Water Island Capital LLC was obtained from its Schedule13F filed with the Commission on or about February 9, 2005.

 

(8)       Includes 5,000 sharesissuable upon exercise of options exercisable within 60 days of February 10,2005.

 

(9)       Includes 1,800 sharesissuable upon exercise of options exercisable within 60 days of February 10,2005.

 

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(10)         Includes 6,250 sharesissuable upon exercise of options exercisable within 60 days of February 10,2005.

 

(11)         Includes 37,500 sharesissuable upon exercise of options exercisable within 60 days of February 10,2005.

 

(12)         Includes 44,601 sharesissuable upon exercise of options exercisable within 60 days of February 10,2005.

 

Mr. Saldutti, a director of the Corporation, is ageneral partner of Ardent Research Partners, L.P and Ardent Research Partners,LTD. and may be deemed the beneficial owner of the shares beneficially owned bysuch entities. Mr. Saldutti disclaims beneficial ownership of the 99,242 sharesof Common Stock beneficially owned by Ardent Research Partners, L.P and 99,242shares beneficially owned by Ardent Research Partners, LTD., except to theextent of his pecuniary interest therein.

 

(13)        Includes 60,000 sharesissuable upon exercise of options exercisable within 60 days of February 10,2005.

 

(14)        Includes 71,000 sharesissuable upon exercise of options exercisable within 60 days of February 10,2005.

** **

(15)        Includes 23,250 sharesissuable upon exercise of options exercisable within 60 days of February 10,2005.

** **

(16)        Includes 309,401 sharesissuable upon exercise of options exercisable within 60 days of February 10,2005.

** **

** **

**EQUITY COMPENSATION PLAN INFORMATION**

 

Thefollowing table summarizes our equity compensation plan information as ofDecember 31, 2004 with respect to outstanding awards and shares remainingavailable for issuance under the Company’s existing equity compensation plans.Information is included in the table as to common stock that may be issuedpursuant to the Company’s equity compensation plans.

 
| **Plan category**                                                              | ** ** | **Number of securities to  be issued upon exercise of   outstanding options,   warrants and rights** | ** ** | **Weighted-average exercise   price of outstanding options,   warrants and rights** | ** ** | **Number of securities   remaining available for   future issuance under equity   compensation plans   (excluding securities   reflected in column (a))** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **(a)**                                                                                              | ** ** | **(b)**                                                                             | ** ** | **(c)**                                                                                                                                                        | ** ** |
| Equity  compensation plans approved by the Corporation’s stockholders(1)  |       | 3,866,409                                                                                            |       | $                                                                                   | 6.69       |                                                                                                                                                           | 2,120,450  |   |
|                                                                           |       |                                                                                                 |       |                                                                                |       |                                                                                                                                                           |       |
| Equity  compensation plans not approved by the Corporation’s stockholders |       | —                                                                                               |       | —                                                                              |       | —                                                                                                                                                         |       |
|                                                                           |       |                                                                                                 |       |                                                                                |       |                                                                                                                                                           |       |
| Totals                                                                         |       | 3,866,409                                                                                            |       | $                                                                                   | 6.69       |                                                                                                                                                           | 2,120,450  |   |

 

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(1)  Includes the following equity compensationplans:

 

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Restated and Amended 1989Stock Option Plan (no more awards will be issued under this plan);1993 StockOption and Incentive Plan (no more awards will be issued under thisplan);Second Amended and Restated 1995 Stock Plan; Amended and Restated 1995Non-Employee Director Stock Option Plan; 2004 Stock Plan; and 2004 Non-EmployeeDirector Stock Option Plan.

 

Excludes 161,894 sharesavailable for issuance pursuant to the 1995 Employee Stock Purchase Plan, asthat Plan was terminated immediately following the purchase by employees of 38,103shares of Common Stock on December 31, 2004.

 

Includes the Amended andRestated 1996 Equity Compensation Plan of The Sentry Group, Inc.The Corporation assumed options outstanding under this plan in connection withits acquisition of The Sentry Group in October 1998. As ofDecember 31, 2004, there were options to purchase an aggregate of 23,078shares of our Common Stock outstanding with a weighted average exercise priceof $21.79 per share. The Corporation has not and will not issue any additionalawards under this plan.

** **

**Compensation Committee Interlocks andInsider Participation**

 

TheBoard of Directors has established a Compensation Committee, consisting ofMessrs. Gruner and Simmons. No members of the Compensation Committee areofficers, employees or former officers of the Corporation. No executive officerof the Corporation served as a member of the compensation committee or board ofdirectors of another entity (or other committee of the board of directorsperforming equivalent functions or, in the absence of any such committee, theentire board of directors), one of whose executive officers served on thecompensation committee or as a director of the Corporation.

 

**Item 13.**    CertainRelationships and Related Transactions.

** **

**Certain Relationships And Related Transactions**

 

TheCorporation had subscribed for up to $4.0 million in limited partnershipinterests in the JMI Fund. Distributions from the JMI Fund in excess of areturn of capital and the Corporation’s cost of capital were intended to fundpayouts under the Long Term Incentive Plan. In June 2001, the Corporationsold its limited partnership interest in the JMI Fund to affiliates of the JMIFund and an unrelated third party for total proceeds of $3.15 million. TheCorporation recorded a loss on the sale of $26,000. Prior to the Corporation’ssale of its limited partnership interest in the JMI Fund, each participant inthe Long Term Incentive Plan (including certain executive officers) terminatedhis or her interest in and rights to units under the Long Term Incentive Planin consideration for stock options granted by the Corporation.Contemporaneously with the Corporation’s subscription to the JMI Fund,JMI, Inc., the management company of the JMI Fund,became a full-service client of the Corporation. In the years endedDecember 31, 2003, 2002 and 2001, the Corporation received $52,500,$100,000 and $115,000 from JMI, Inc. in consideration of services andconsulting. Mr. Harry Gruner, a director of the Corporation, is a managingmember of JMI Side Associates, L.L.C (the general partner of the JMI Fund), is 

 

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affiliated withcertain of the purchasers, purchased approximately three percent of the limitedpartnership interests sold by the Corporation, and is a principal ofJMI, Inc.

 

Asof February 5, 2004, the Corporation entered into an Amended and RestatedEmployment Agreement with John A. Piontkowski, the Corporation’s formerExecutive Vice President, Chief Financial Officer, Treasurer and Secretary (the“Piontkowski Agreement”). Pursuant to the terms of the Piontkowski Agreement,Mr. Piontkwoski agreed to serve as a full-time Senior Vice President ofthe Corporation on an “at-will” basis. For such services, the PiontkowskiAgreement provides that Mr. Piontkowski will be paid a monthly salary of$17,850, and an annual bonus of up to $96,390 based upon the attainment ofmutually agreed upon milestones and approval of payment by the CompensationCommittee of the Board of Directors. In addition, if the Corporation terminatesMr. Piontkowski other than for cause, or if Mr. Piontkowskiterminates the Piontkowski Agreement prior to February 4, 2005,Mr. Piontkowski will receive (i) his base salary and vacation earnedbut unpaid through the termination date, and (ii) upon execution of arelease of claims, the remainder of his base salary through the balance of theTerm of the Agreement (the “Severance Period”); provided that such amounts willcease being paid if and when Mr. Piontkowski secures other employment (butin such event he will receive an additional three months of base salary), and(iii) any earned portion of the annual bonus, subject to any conditionsimposed thereon by the Compensation Committee and the Corporation’s normalpractices with respect to bonus payments, and (iv) reimbursement of COBRAexpenses during the Severance Period. The Piontkowski Agreement continues for aterm ending on February 4, 2005. The Piontkowski Agreement superseded theprior agreement between Mr. Piontkowski and the Corporation datedMarch 1, 2002.

 

InJune 2004, the Company and Alfred J. Amoroso entered into a Transition andSeverance Agreement.  Pursuant to suchagreement, Mr. Amoroso agreed to transition his prior duties andresponsibilities as President and Chief Executive Officer to one or more of theBoard’s designees, and to be available as needed to complete such transition byJuly 31, 2004.  In connection with suchagreement, the Company agreed to pay Mr. Amoroso approximately $108,000 inseverance, plus health insurance premiums for Mr. Amoroso until the earlier ofDecember 31, 2004 or such time as Mr. Amoroso’s COBRA eligibility ceased.  The Company also extended the exercise periodof Mr. Amoroso’s stock options in certain circumstances for a period of oneyear.  The Transition and SeveranceAgreement was filed as an exhibit to the Company’s Form 10-Q for the quarterended June 30, 2004.

 

InAugust 2004, the Company and Dale Kutnick entered into a Consulting ServicesAgreement, whereby Mr. Kutnick agreed to provide various consulting services tothe Company through January 31, 2005 in exchange for a retainer of $25,000(paid monthly) plus, for any specific, incremental Company-initiated consultingengagements that are fulfilled by the Consultant, the Consultant will receivean additional 40% of the value of those engagements above the Consultant’sretainer and the Company will retain 60% of the value thereof.  The Company also agreed to pay Mr. Kutnick’smedical, dental, and vision insurance, though it was also confirmed that Mr.Kutnick will not be eligible for or receive any long-term disability insurance,holiday or vacation pay, retirement benefits, or any other fringe benefit underprograms, including stock purchase plans, maintained by the Company for itsemployees.  The Consulting ServicesAgreement was filed as an exhibit to the Company’s Form 10-Q for the quarterended September 30, 2004.

 

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InAugust 2004, the Company and Dr. Howard Rubin entered into an Amended andRestated Employment, Compensation and Release Agreement (the “RestatedAgreement”).  The term of the Restated Agreement is through December 31,2008, but is subject to earlier termination. The Restated Agreement supersedes Dr. Rubin’s prior arrangements withthe Company regarding potential earnout payments associated with the Company’sacquisition of Rubin Systems, Inc. in October 2000.  The Restated Agreement provides,effective as of January 1, 2004, for the following earnout arrangements:

 

•               Dr. Rubin’s earnout potential forthe term of the Restated Agreement is $2,300,000, split into equal $460,000annual increments for the years 2004 and 2008.  Of the $460,000, Dr. Rubincan earn up to $230,000 per year based on Company performance or other criteriaestablished by the Company’s Compensation Committee, and he can earn up toanother $230,000 based on a percentage of the Company’s WWB benchmark, WWBpublication and WWB guru consulting revenue (“WWB Revenue”).  The amountearned is a percentage of the WWB Revenue is equal to ten percent, eightpercent, seven percent, five percent and four percent in each of fiscal years2004, 2005, 2006, 2007 and 2008, respectively, capped at $230,000 peryear.  No carryover is permitted.

 

•               Dr. Rubin is not eligible for anyearnout payments for a given fiscal year if his retainer consulting revenue forthe year is less than $1 million.

 

The RestatedAgreement was filed as an exhibit to the Company’s Form 10-Q for the quarterended September 30, 2004.

 

InNovember 2004, the Company and Herb VanHook entered into a Severance Agreementand Release.  Pursuant to the Agreement,Mr. VanHook released any claims he might have against the Company in exchangefor a lump sum payment of approximately $106,000 and the extension of the exerciseperiod of certain of his vested stock options to October 18, 2005 under certainconditions.  The Severance Agreement andRelease was filed as an exhibit to the Company’s Form 10-Q for the quarterended September 30, 2004.

 

InNovember 2004, the Company and CD Hobbs entered into an Employment Agreementwhereby Mr. Hobbs agreed to serve as the Company’s President and ChiefOperating Officer, in exchange for a monthly salary of $25,000, payable in twoequal payments per month pursuant to the Company’s normal payroll practices,plus a bonus to be decided upon in good faith by the Company, a stock grant of50,000 shares of Common Stock pursuant to the Company’s 2004 Stock Plan, plus aone-time cash gross-up for federal (not state) income tax purposes on suchgrant.   Additionally, the Agreementprovided that Mr. Hobbs was entitled to participate, to the extent eligibleunder the terms and conditions thereof, in any medical insurance plans, 401(k)plans, deferred compensation plans, life insurance plans, vacation, retirementor other Executive benefit plans which are generally available to executives ofthe Company or are available to senior executives or a select group ofexecutives of the Company and which may be in effect from time to time duringExecutive’s employment with the Company.  Mr. Hobbs was also authorized toincur on behalf and for the benefit of, and shall be reimbursed by, the Companyfor reasonable expenses, provided that such expenses are substantiated inaccordance with Company policies.

 

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Additionally,the Employment Agreement provides for separation benefits in favor of Mr.Hobbs, provided he executes and delivers a general release of all claims and aresignation from all of his positions with the Company and its affiliates.  The benefits are generally as follows:  If the Company terminates Mr. Hobbs withoutcause within six months following the consummation of a change of control orMr. Hobbs resigns from all positions of employment with the Company not lessthan three months and not more than six months following the consummation of achange of control, or Mr. Hobbs resigns from all positions of employment withthe Company after an involuntary termination prior to or within six months followingthe consummation of a change of control, he is entitled to receive eight monthsof salary continuation, plus his target bonus for the year in which thetermination occurs (pro rated for the portion of the year worked), and theCompany shall reimburse Mr. Hobbs for the costs of his group medical insurancepremiums for himself and his dependents under COBRA for the eight (8) monthperiod immediately following his termination.

 

Mr.Hobbs’s Employment Agreement, along with his stock grant agreement, were filedas an exhibit to the Company’s Form 10-Q for the quarter ended September 30,2004.

 

**Item14.**                            Principal Accountant Fees and Services.

** **

The followingtable sets forth the fees billed to or incurred by the Corporation forprofessional services rendered by Deloitte & Touche LLP, theCorporation’s independent registered public accounting firm, for the yearsended December 31, 2004 and 2003: 

 
| **Type of Fees**    | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
| Audit Fees          |       | $        | 625,624    |     | $          | 680,583 |   |
| Audit-Related  Fees |       | 157,285  |       | 18,400   |       |
| Tax Fees            |       | 119,640  |       | 128,482  |       |
| All Other Fees      |       | 27,500   |       | —   |       |
|                |       |     |       |     |       |
| Total Fees          |       | $        | 930,049    |     | $          | 827,465 |   |

 

Inaccordance with the SEC’s definitions and rules, “audit fees” are fees theCorporation incurred for professional services in connection with the audit ofMETA Group’s consolidated financial statements included in Form 10-K andthe review of financial statements included in Form 10-Qs, and forservices that are normally provided in connection with statutory and regulatoryfilings or engagements; “audit-related fees” are fees for the audit of theCorporation’s 401(k) Plan; “tax fees” are fees for tax compliance, tax adviceand tax planning; and “all other fees” are fees for any services not includedin the first three categories.

 

Theindependent auditors did not provide any financial information systems designand implementation services during the year ended December 31, 2004. TheCorporation’s Audit Committee did consider whether the provision of suchservices, tax services and all other services (if any) is compatible with theindependent auditor’s independence.

 

Consistentwith Section 10A(i)(2) of the Securities Exchange Act of 1934 as added bySection 202 of the Sarbanes-Oxley Act of 2002, we are responsible forlisting the audit and

 

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non-audit servicespre-approved by our Audit Committee to be performed by Deloitte & ToucheLLP, our external auditor. Each of the permitted non-audit services has beenpre-approved by the Audit Committee or the Audit Committee’s Chairman pursuantto delegated authority by the Audit Committee, other than de minimis non-auditservices for which the pre-approval requirements are waived in accordance withthe rules and regulations of the SEC. During fiscal 2004, the Audit Committeepre-approved the following non-audit services anticipated to be performed byDeloitte & Touche LLP: 1) statutory audits of the Company’s variousoverseas subsidiaries, 2) due diligence support work related to the merger withGartner, Inc., and 3) tax consulting related to compliance, advice andplanning as quantified above.

 

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**PART IV**

 

**ITEM 15.****                                  EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K**

 

(a)(1)       *Financial Statements.*

 

The following financial statements are included inItem 8 of this report:

 
| ** **                                                                                                              | ** **                                                                                   | **Page**                        |
|-------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------|---------------------------------|
| Report  of Independent Registered Public Accounting Firm                                                                |                                                                                         | F-1                             |
|                                                                                                                    |                                                                                         |                            |
| Consolidated Balance Sheets  at December 31, 2004 and 2003                                                              |                                                                                         | F-2                             |
|                                                                                                                    |                                                                                         |                            |
| Consolidated  Statements of Operations for the years ended December 31, 2004, 2003, and  2002                           |                                                                                         | F-3                             |
|                                                                                                                    |                                                                                         |                            |
| Consolidated  Statements of Changes in Stockholders’ Equity for the years ended December  31, 2004, 2003, and 2002 |                                                                                         | F-4                             |
|                                                                                                                    |                                                                                         |                            |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2004, 2003, and  2002                           |                                                                                         | F-5                             |
|                                                                                                                    |                                                                                         |                            |
| Notes to Consolidated  Financial Statements                                                                             |                                                                                         | F-6                             |
|                                                                                                                    |
|                                                                                                                    | (a)(2)                                                                                       | *Financial Statement Schedule.* |
|                                                                                                                    |
|                                                                                                                    | The following financial  statement schedule for the Company is filed as part of this report: |                            |   |
|                                                                                                                    |                                                                                         |                            |
| Schedule  II — Valuation and Qualifying Accounts                                                                   |                                                                                         | S-1                             |
|                                                                                                                         |                                                                                              |                                 |  |  |

 

Schedules not listed above have been omitted becausethe information required to be set forth therein is not applicable or is shownin the accompanying Consolidated Financial Statements or notes thereto.

 

68

----

 

(a)(3)       *List of Exhibits.*

 

The following exhibitsare filed as part of and incorporated by reference into this Annual Report onForm 10-K:

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                    |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                               |
| 2.1(16)              |       | Agreement and Plan of  Merger, dated as of December 26, 2004, by and among Gartner, Inc., META  Group, Inc. and Green Falcon, Inc. |
|                 |       |                                                                                                                               |
| 3.1(1)               |       | Amended and Restated  Certificate of Incorporation of the Company                                                                  |
|                 |       |                                                                                                                               |
| 3.2(1)               |       | Amended and Restated  Bylaws of the Company                                                                                        |
|                 |       |                                                                                                                               |
| 4.1(1)               |       | Specimen Certificate  Representing the Common Stock                                                                                |
|                 |       |                                                                                                                               |
| 10.1(7)              | *          | Second Amended and  Restated 1995 Stock Plan                                                                                       |
|                 |       |                                                                                                                               |
| 10.2(7)              | *          | Form of Incentive Stock  Option Agreement under the Second Amended and Restated 1995 Stock Plan                                    |
|                 |       |                                                                                                                               |
| 10.3(7)              | *          | Form of Non-Qualified  Stock Option Agreement under the Second Amended and Restated 1995 Stock Plan                                |
|                 |       |                                                                                                                               |
| 10.4(3)              | *          | Second Amended and  Restated 1995 Employee Stock Purchase Plan Enrollment Authorization Form                                       |
|                 |       |                                                                                                                               |
| 10.5(8)              | *          | Amended and Restated  1995 Non-Employee Director Stock Option Plan                                                                 |
|                 |       |                                                                                                                               |
| 10.6(2)              | *          | Form of Non-Qualified  Stock Option Agreement under the 1995 Non-Employee Director Stock Option Plan  of the Registrant            |
|                 |       |                                                                                                                               |
| 10.7(1)              | (15)*      | Agreement between First  Albany Corporation and the Company dated March 30, 1995                                                   |
|                 |       |                                                                                                                               |
| 10.8(1)              | *          | Restated and Amended  1989 Stock Option Plan, as amended                                                                           |
|                 |       |                                                                                                                               |
| 10.9(1)              | *          | Form of Incentive Stock  Option Agreement under 1989 Stock Option Incentive Plan                                                   |
|                 |       |                                                                                                                               |
| 10.10(1)             | *          | Form of Certificate and  Agreement under Restated and Amended 1989 Stock Option Plan                                               |
|                 |       |                                                                                                                               |
| 10.11(1)             | *          | 1993 Stock Option and  Incentive Plan, as amended                                                                                  |
|                 |       |                                                                                                                               |
| 10.12(1)             | *          | Form of Certificate and  Agreement under 1993 Stock Option and Incentive Plan                                                      |
|                 |       |                                                                                                                               |
| 10.13(1)             | *          | Form of Warrant under  the Restated and Amended 1989 Stock Option Plan and 1993 Stock Option and  Incentive Plan                   |
|                 |       |                                                                                                                               |
| 10.15(1)             |       | Office Lease between  International Business Machines Corporation and the Company dated August 1,  1994                            |

 

69

----

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                     |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.17(4)             | *          | Amended and Restated  1996 Equity Compensation Plan of The Sentry Group, Inc.                                                                       |
|                 |       |                                                                                                                                                |
| 10.18(8)             | *          | Second Amended and  Restated 1995 Employee Stock Purchase Plan                                                                                      |
|                 |       |                                                                                                                                                |
| 10.19(5)             | *          | Asset Purchase  Agreement among Rubin Systems Inc., Howard Rubin, and META Group, Inc. dated  as of October 27, 2000                                |
|                 |       |                                                                                                                                                |
| 10.20(5)             | *          | Employment and  Management Agreement between META Group, Inc. and Howard Rubin dated as of  October 27, 2000                                        |
|                 |       |                                                                                                                                                |
| 10.21 (5)            |       | Office Lease between  Harbor Vista Associates Limited Partnership and the Company dated March 31,  1999                                             |
|                 |       |                                                                                                                                                |
| 10.23(6)             |       | Form of META Group,  Inc./JMI Long Term Incentive Compensation Plan Waiver and Release Agreement                                                    |
|                 |       |                                                                                                                                                |
| 10.28(9)             | *          | Employee  Noncompetition, Nondisclosure and Developments Agreement between META Group,  Inc. and Alfred J. Amoroso dated as of July 31, 2002        |
|                 |       |                                                                                                                                                |
| 10.29(9)             | *          | Severance Agreement  between META Group, Inc. and Dale Kutnick dated as of July 31, 2002                                                            |
|                 |       |                                                                                                                                                |
| 10.30(9)             | (10)*      | Amendment to Option  Agreements between META Group, Inc. and Dale Kutnick dated as of July 31,  2002                                                |
|                 |       |                                                                                                                                                |
| 10.31(9)             | *          | Non-Qualified Stock  Option Agreement between META Group, Inc. and Dale Kutnick dated August 14,  2002                                              |
|                 |       |                                                                                                                                                |
| 10.32(9)             | *          | Registration Rights  Agreement between META Group, Inc. and Dale Kutnick dated as of July 31, 2002                                                  |
|                 |       |                                                                                                                                                |
| 10.33(9)             | *          | Amendment No. 1 to  Asset Purchase Agreement among Rubin Systems, Inc., Howard Rubin and META  Group, Inc., dated as of July 31, 2002               |
|                 |       |                                                                                                                                                |
| 10.34(9)             | *          | Revised Exhibit A to  the Amended Asset Purchase Agreement among Rubin Systems, Inc., Howard Rubin  and META Group, Inc., dated as of July 31, 2002 |
|                 |       |                                                                                                                                                |
| 10.35(9)             | *          | Amendment No. 1 to  Employment and Management Agreement between META Group, Inc. and Howard Rubin  dated as of July 31, 2002                        |
|                 |       |                                                                                                                                                |
| 10.36(9)             | *          | Amendment No. 1 to  Non-competition Agreement between Howard Rubin and META Group, Inc. dated as  of July 31, 2002                                  |
|                 |       |                                                                                                                                                |
| 10.37(9)             | *          | Amendment No. 1 to  Non-Qualified Stock Option Agreement between Howard Rubin and META Group,  Inc., dated as of July 31, 2002                      |

 

70

----

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                     |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.39(11)            | *          | Amendment No. 2 to  Employment and Management Agreement between META Group, Inc. and Howard Rubin  dated as of January 30, 2003                                     |
|                 |       |                                                                                                                                                                |
| 10.40(11)            |       | Waiver No. 2 dated as  of March 12, 2003 to the Amended and Restated Credit Agreement between META  Group, Inc. and The Bank of New York dated November 5, 2001     |
|                 |       |                                                                                                                                                                |
| 10.41(11)            |       | Amended and Restated  Credit Agreement between META Group, Inc. and The Bank of New York dated  March 12, 2003                                                      |
|                 |       |                                                                                                                                                                |
| 10.42(11)            |       | Revolving Credit Note  of META Group, Inc. in favor of The Bank of New York in the principal amount  of $6,000,000 dated March 12, 2003                             |
|                 |       |                                                                                                                                                                |
| 10.43(11)            |       | Amended and Restated  Security Agreement between META Group, Inc. and The Bank of New York dated  March 12, 2003                                                    |
|                 |       |                                                                                                                                                                |
| 10.44(11)            |       | Amendment No. 2 to  Asset Purchase Agreement among Rubin Systems, Inc., Howard Rubin and META  Group, Inc. dated as of January 30, 2003                             |
|                 |       |                                                                                                                                                                |
| 10.45(12)            | *          | Transition and  Severance Agreement, Amendment to Option Agreements between Alfred J. Amoroso  and META Group, Inc.                                                 |
|                 |       |                                                                                                                                                                |
| 10.46(13)            | *          | META Group, Inc. 2004  Stock Plan                                                                                                                                   |
|                 |       |                                                                                                                                                                |
| 10.47(13)            | *          | META Group, Inc. 2004  Non-Employee Director Stock Option Plan                                                                                                      |
|                 |       |                                                                                                                                                                |
| 10.48(14)            | *          | Consulting Services  Agreement between Dale Kutnick and META Group, Inc.                                                                                            |
|                 |       |                                                                                                                                                                |
| 10.49(14)            | *          | Amendment No.1 to  Amended and Restated Credit Agreement between META Group, Inc.and The Bank of  New York dated November 4, 2004                                   |
|                 |       |                                                                                                                                                                |
| 10.50(14)            | *          | Employment Agreement  and Stock Grant Agreement between CD Hobbs and META Group, Inc.                                                                               |
|                 |       |                                                                                                                                                                |
| 10.51(14)            | *          | Severance Agreement and  Release between Herb VanHook and META Group, Inc.dated as of November 5, 2004                                                              |
|                 |       |                                                                                                                                                                |
| 10.52(14)            | *          | Amended and Restated  Employment, Compensation and Release Agreement between META Group, Inc.,  Rubin Systems, Inc. and Howard A. Rubin dated as of August 23, 2004 |
|                 |       |                                                                                                                                                                |
| 14.1                 | †     | Code of Ethics                                                                                                                                                      |
|                 |       |                                                                                                                                                                |
| 21.1                 | †     | List of Subsidiaries                                                                                                                                                |
|                 |       |                                                                                                                                                                |
| 23.1                 | †     | Consent of Deloitte  & Touche LLP                                                                                                                               |
|                 |       |                                                                                                                                                                |
| 24.1                 | †     | Power of Attorney (see  page 60)                                                                                                                                    |
|                 |       |                                                                                                                                                                |
| 31.1                 | †     | Certification of the  Principal Executive Officer pursuant to Section 302(a) of the Sarbanes Oxley  Act of 2002                                                     |

 

71

----

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                               |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2†           |       | Certification of the  Principal Financial Officer pursuant to Section 302(a) of the Sarbanes Oxley  Act of 2002                               |
|                 |       |                                                                                                                                          |
| 32.1†           |       | Certifications of the  Principal Executive Officer and Principal Financial Officer pursuant to  Section 906 of the Sarbanes Oxley Act of 2002 |

 

----

(1)                      Incorporatedherein by reference to the exhibits to the Company’s Registration Statement onForm S-1 (File No. 33-97848)

(2)                      Incorporatedherein by reference to the exhibits to the Company’s Registration Statement onForm S-8 as filed on March 1, 1996 (File No. 333-1854)

(3)                      Incorporatedherein by reference to the exhibits to the Company’s Registration Statement onform S-8 as filed on December 19, 1995 (File No. 33-80539)

(4)                      Incorporatedherein by reference to the exhibits to the Company’s Registration Statement onForm S-8 as filed on December 3, 1998 (File No. 333-68323)

(5)                      Incorporatedherein by reference to the exhibits to the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2000 and filed on April 2, 2001 (File No.0-27280)

(6)                      Incorporatedherein by reference to the exhibits to the Company’s Quarterly Report on Form10-Q for the quarterly period ended June 30, 2001 and filed on August 14, 2001(File No. 0-27280)

(7)                      Incorporatedherein by reference to the exhibits to the Company’s Tender Offer Statement onSchedule TO filed on September 19, 2001

(8)                      Incorporatedherein by reference to the exhibits to the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2001 and filed on April 1, 2002 (File No.0-27280)

(9)                      Incorporatedherein by reference to the exhibits to the Company’s Quarterly Report on Form10-Q for the quarterly period ended September 30, 2002 and filed on November14, 2002 (File No. 0-27280)

(10)                Includedin Exhibit 10.29

(11)                Incorporatedherein by reference to the exhibits to the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2002 and filed on March 28, 2003 (File No.0-27280)

(12)                Incorporatedherein by reference to the exhibits to the Company’s Quarterly Report on Form10-Q for the quarterly period ended June 30, 2004 and filed on August 16, 2004(File No. 0-27280)

(13)                Incorporatedherein by reference to the exhibits to the Company’s Form S-8 filed on October 5,2004 (File No. 333-119545)

(14)                Incorporatedherein by reference to the exhibits to the Company’s Quarterly Report on Form10-Q for the quarterly period ended September 30, 2004 and filed on November 15,2004 (File No. 0-27280)

(15)                Confidentialtreatment obtained as to certain portions.

(16)                Incorporated herein by reference to the exhibits to the Company’s CurrentReport on Form 8-K filed on December 29, 2004.

 

*          Indicates a management contract or anycompensatory plan, contract, or arrangement.

†                              Filedherewith.

 

72

----

 

**(b)           *Reports on Form 8-K***

 

On November 8, 2004, theCompany filed a report on Form 8-K in connection with a release of the Company’sresults of operations for the quarter ended September 30, 2004.

 

On November 10, 2004, theCompany filed a report on Form 8-K in connection with

theentering into of an amendment of its Amended and Restated Credit Agreement withthe Bank of New York dated November 4, 2004.

 

On December 29, 2004, the Company filed a report onForm 8-K in connection with the entering of an agreement and plan of mergerdated December 26, 2004 by and among Gartner, Inc., Green Falcon, Inc. and METAGroup, Inc.

 

**(c)           *Exhibits*.**

 

The Company hereby filesas part of this Annual Report on Form 10-K the exhibits listed in Item 15(a)(3) set forth above.

 

73

----

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|                 | META Group, Inc. |
|----------------------|------------------|
|                 |             |
|                 |             |
| Date: March 31, 2005 | By:              | /s/ CD Hobbs |   |
|                 |             | CD Hobbs |
|                 |             | President and Chief  Operating Officer |

 

 

**POWER OFATTORNEY AND SIGNATURES**

 

We, the undersignedofficers and directors of META Group, Inc., hereby severally constitute andappoint CD Hobbs and John W. Riley and each of them singly, our true and lawfulattorneys, with the power to them and each of them singly, to sign for us andin our names in the capacities indicated below, any amendments to this Reporton Form 10-K, and generally to do all things in our names and on our behalf insuch capacities to enable META Group, Inc. to comply with the provisions of theSecurities Exchange Act of 1934, as amended, and all the requirements of theSecurities and Exchange Commission.

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the Registrant, in the capacities indicated, on the 31stday of March 2005.

 

 
| **Signature**     | ** ** | ** ** | **Title(s)**                                                                               |
|-------------------|------------|------------|--------------------------------------------------------------------------------------------|
| ** **        | ** ** | ** ** | ** **                                                                                 |
| /s/ Dale Kutnick  |       |       | Chairman of the Board  of Directors                                                        |
| Dale Kutnick      |       |       |                                                                                       |
|              |       |       |                                                                                       |
| /s/ CD Hobbs      |       |       | President and Chief  Operating Officer (Principal                                          |
| CD Hobbs          |       |       | Executive Officer)                                                                         |
|              |       |       |                                                                                       |
| /s/ John W. Riley |       |       | Vice President, Chief  Financial Officer,                                                  |
| John W. Riley     |       |       | Treasurer, and  Secretary (Principal Financial   Officer and Principal Accounting Officer) |

 

74

----

 
| **Signature**           | ** ** | ** ** | **Title(s)** |
|-------------------------|------------|------------|--------------|
|                    |       |       |         |
| /s/ Gayl W. Doster      |       |       | Director     |
| Gayl W. Doster          |       |       |         |
|                    |       |       |         |
| /s/ Harry S. Gruner     |       |       | Director     |
| Harry S. Gruner         |       |       |         |
|                    |       |       |         |
| /s/ Francis J. Saldutti |       |       | Director     |
| Francis J. Saldutti     |       |       |         |
|                    |       |       |         |
| /s/ Michael Simmons     |       |       | Director     |
| Michael Simmons         |       |       |         |

 

75

----

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

The Board of Directorsand Stockholders of

META Group, Inc.

Stamford, Connecticut

 

We have audited theaccompanying consolidated balance sheets of META Group, Inc. and subsidiaries(the “Company”) as of December 31, 2004 and 2003 and the relatedconsolidated statements of operations, changes in stockholders’ equity, andcash flows for each of the three years in the period ended December 31,2004. Our audits also included the financial statement schedule listed at Item15(a)(2). These financial statements and financialstatement schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements andfinancial statement schedule based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. The Companyis not required to have, nor were we engaged to perform, an audit of itsinternal control over financial reporting. Our audit included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of META Group, Inc. and subsidiaries as of December 31,2004 and 2003, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2004 inconformity with accounting principles generally accepted in the United Statesof America. Also in our opinion, such financial statement schedule, whenconsidered in relation to the basic consolidated financial statements taken asa whole, presents fairly in all material respects the information set forththerein.

 

As discussed in Note 4 tothe consolidated financial statements, effective January 1, 2002, the Companyadopted Statement of Financial Accounting Standards No. 142, “Goodwill andOther Intangible Assets”.

 

 
| /s/ Deloitte &  Touche LLP |   |
|--------------------------------|--------|
| Stamford, Connecticut          |
| March 23, 2005                 |

 

F-1

----

 

**METAGROUP, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(Inthousands, except share data)**

** **
| ** **                                                                                                           | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                           | ** ** | **2004**         | ** ** | **2003** | ** ** |
| **ASSETS**                                                                                                           |       |             |       |   |   |
| Current assets:                                                                                                      |       |             |       |   |   |
| Cash and cash  equivalents                                                                                           |       | $                | 6,899      |   | $ | 8,814 |   |
| Restricted cash                                                                                                      |       | 6,000            |       | — |   |
| Accounts  receivable, less allowance for doubtful accounts of $1,065 and $1,026,  respectively                       |       | 41,042           |       | 38,693 |   |
| Deferred  commissions                                                                                                |       | 1,614            |       | 1,550 |   |
| Other current  assets                                                                                                |       | 4,865            |       | 2,591 |   |
| Total current assets                                                                                                 |       | 60,420           |       | 51,648 |   |
|                                                                                                                 |       |             |       |   |   |
| Restricted cash                                                                                                      |       | —           |       | 6,000 |   |
| Non-current  portion of accounts receivable                                                                          |       | 2                |       | 184 |   |
| Property and  equipment, net                                                                                         |       | 4,580            |       | 5,392 |   |
| Goodwill                                                                                                             |       | 16,688           |       | 13,016 |   |
| Intangible  assets, net                                                                                              |       | 8,533            |       | 8,982 |   |
| Investments and  advances                                                                                            |       | 1,009            |       | 1,146 |   |
| Other non-current assets                                                                                             |       | 688              |       | 344 |   |
| Total assets                                                                                                         |       | $                | 91,920     |   | $ | 86,712 |   |
|                                                                                                                 |       |             |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                       | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                                                                                                           | ** ** | ** **       | ** ** | ** ** | ** ** |
| Current  liabilities:                                                                                                | ** ** | ** **       | ** ** | ** ** | ** ** |
| Accounts payable                                                                                                     |       | $                | 2,391      |   | $ | 2,041 |   |
| Deferred  revenues                                                                                                   |       | 46,740           |       | 48,891 |   |
| Notes payable                                                                                                        |       | 487              |       | 438 |   |
| Accrued  compensation                                                                                                |       | 6,398            |       | 5,495 |   |
| Accrued and  other current liabilities                                                                               |       | 21,152           |       | 16,618 |   |
| Total current  liabilities                                                                                           |       | 77,168           |       | 73,483 |   |
|                                                                                                                 |       |             |       |   |   |
| Long-term  portion of notes payable                                                                                  |       | 708              |       | 1,040 |   |
| Non-current  deferred revenues                                                                                       |       | 19               |       | 549 |   |
| Other  non-current liabilities                                                                                       |       | 1,571            |       | 1,244 |   |
| Total  non-current liabilities                                                                                       |       | 2,298            |       | 2,833 |   |
|                                                                                                                 |       |             |       |   |   |
| Total  liabilities                                                                                                   |       | 79,466           |       | 76,316 |   |
| Minority  interest                                                                                                   |       | —           |       | 322 |   |
| Commitments and  contingencies                                                                                       |       |             |       |   |   |
|                                                                                                                 |       |             |       |   |   |
| Stockholders’  equity:                                                                                          |       |             |       |   |   |
| Preferred stock,  $0.01 par value, authorized 2,000,000 shares; none issued                                          |       | —           |       | — |   |
| Common stock,  $0.01 par value, authorized 45,000,000 shares; issued 15,417,011 and  14,303,655 shares, respectively |       | 154              |       | 143 |   |
| Paid-in capital                                                                                                      |       | 64,824           |       | 61,013 |   |
| Accumulated  deficit                                                                                                 |       | (52,360          | )          | (50,197 | ) |
| Accumulated  other comprehensive income (loss)                                                                       |       | 156              |       | (565 | ) |
| Treasury stock,  at cost, 647,016 shares                                                                             |       | (320             | )          | (320 | ) |
| Total  stockholders’ equity                                                                                     |       | 12,454           |       | 10,074 |   |
| Total  liabilities and stockholders’ equity                                                                     |       | $                | 91,920     |   | $ | 86,712 |   |

 

See notes toconsolidated financial statements.

 

F-2

----

 

**METAGROUP, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Inthousands, except per share data)**

 
| ** **                                                                                                          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenues:                                                                                                           |       |     |       |     |       |     |       |
| Advisory  services                                                                                                  |       | $        | 88,960     |     | $          | 78,257   |       | $ | 77,113 |   |
| Strategic  consulting                                                                                               |       | 44,126   |       | 35,747   |       | 32,009   |       |
| Published  research products                                                                                        |       | 5,735    |       | 5,980    |       | 4,940    |       |
| Reimbursable  expenses                                                                                              |       | 2,680    |       | 2,501    |       | 2,471    |       |
| Total revenues                                                                                                      |       | 141,501  |       | 122,485  |       | 116,533  |       |
|                                                                                                                |       |     |       |     |       |     |       |
| Operating  expenses:                                                                                                |       |     |       |     |       |     |       |
| Cost of services  and fulfillment                                                                                   |       | 70,227   |       | 64,028   |       | 59,182   |       |
| Reimbursable  expenses                                                                                              |       | 2,680    |       | 2,501    |       | 2,471    |       |
| Selling and  marketing                                                                                              |       | 40,307   |       | 33,398   |       | 31,114   |       |
| General and  administrative                                                                                         |       | 20,685   |       | 19,721   |       | 17,230   |       |
| Depreciation and  amortization                                                                                      |       | 4,745    |       | 4,989    |       | 6,281    |       |
| Restructuring  charge                                                                                               |       | 1,755    |       | 1,642    |       | 362      |       |
| Loss on  facilities leases                                                                                          |       | —   |       | 999      |       | 2,189    |       |
| Merger costs                                                                                                        |       | 2,329    |       | —   |       | —   |       |
| Loss on sale of  subsidiary                                                                                         |       | 416      |       | —   |       | —   |       |
| Goodwill  impairment loss                                                                                           |       | —   |       | —   |       | 2,630    |       |
| Total operating  expenses                                                                                           |       | 143,144  |       | 127,278  |       | 121,459  |       |
|                                                                                                                |       |     |       |     |       |     |       |
| Operating loss                                                                                                      |       | (1,643   | )          | (4,793   | )          | (4,926   | )          |
|                                                                                                                |       |     |       |     |       |     |       |
| Other income  (expense):                                                                                            |       |     |       |     |       |     |       |
| Impairment loss  on investments and advances                                                                        |       | (154     | )          | —   |       | (1,075   | )          |
| Other income  (expense), net                                                                                        |       | 131      |       | 784      |       | (144     | )          |
|                                                                                                                |       |     |       |     |       |     |       |
| Loss before  provision for income taxes, minority interest and cumulative effect of change  in accounting principle |       | (1,666   | )          | (4,009   | )          | (6,145   | )          |
|                                                                                                                |       |     |       |     |       |     |       |
| Provision for  income taxes                                                                                         |       | 420      |       | 173      |       | 13,096   |       |
|                                                                                                                |       |     |       |     |       |     |       |
| Minority  interest in income of consolidated subsidiaries                                                           |       | 77       |       | 123      |       | 33       |       |
| Loss before  cumulative effect of change in accounting principle                                                    |       | (2,163   | )          | (4,305   | )          | (19,274  | )          |
|                                                                                                                |       |     |       |     |       |     |       |
| Cumulative  effect of change in accounting principle                                                                |       | —   |       | —   |       | (22,206  | )          |
|                                                                                                                |       |     |       |     |       |     |       |
| Net loss                                                                                                            |       | $        | (2,163     | )        | $          | (4,305   | )          | $ | (41,480 | ) |
|                                                                                                                |       |     |       |     |       |     |       |
| Loss before  cumulative effect of change in accounting principle- per basic and diluted  common share               |       | $        | (0.16      | )        | $          | (0.32    | )          | $ | (1.47 | ) |
| Cumulative  effect of change in accounting principle – per basic and diluted common share                      |       | —   |       | —   |       | (1.70    | )          |
|                                                                                                                |       |     |       |     |       |     |       |
| Net loss – per  basic and diluted common share                                                                 |       | $        | (0.16      | )        | $          | (0.32    | )          | $ | (3.17 | ) |
|                                                                                                                |       |     |       |     |       |     |       |
| Weighted average  number of basic and diluted common shares outstanding                                             |       | 13,865   |       | 13,334   |       | 13,067   |       |

 

See notes toconsolidated financial statements.

 

F-3

----

 

**METAGROUP, INC.**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**(Inthousands)**

 
| ** **                                                  | ** ** | ** ** | ** ** | **Common  Stock** | ** ** | **Paid-in** | ** ** | **Retained    Earnings   (Accumulated** | ** ** | **Accumulated    Other   Comprehensive** | ** ** | **Treasury  Stock** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|-------------------|------------|-------------|------------|-----------------------------------------|------------|------------------------------------------|------------|---------------------|------------|
| ** **                                                  | ** ** | **Total**  | ** ** | **Shares**        | ** ** | **Amount**  | ** ** | **Capital**                             | ** ** | **Deficit)**                             | ** ** | **(Loss)  Income**  | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|                                                        |       |       |       |              |       |        |       |                                    |       |                                     |       |                |       |   |   |   |   |
| Balance, January  1, 2002                                   |       | $          | 52,786     |              | 13,606     |        | $          | 136                                     |       | $                                        | 58,102     |                | $          | (4,412 | ) | $ | (381 | ) | (802 | ) | $ | (659 | ) |
| Exercise of stock  options                                  |       | 2          |       | 1                 |       | 2           |       |                                    |       |                                     |       |                |       |   |   |   |   |
| Issuance of  shares under employee stock purchase plan      |       | 156        |       | 78                |       | 1           |       | 155                                     |       |                                     |       |                |       |   |   |   |   |
| Repurchase of  shares                                       |       | (22        | )          |              |       |        |       |                                    |       |                                     |       |                |       | (10 | ) | (22 | ) |
| Private placement  of common stock                          |       | 425        |       |              |       |        |       | 86                                      |       |                                     |       |                |       | 155 |   | 339 |   |
| Equity-based  compensation                                  |       | 39         |       |              |       |        |       | 39                                      |       |                                     |       |                |       |   |   |   |   |
| Options issued  for purchase of META Group AG               |       | 412        |       |              |       |        |       | 412                                     |       |                                     |       |                |       |   |   |   |   |
| Rubin Systems,  Inc. earnout shares                         |       | 912        |       | 202               |       | 2           |       | 910                                     |       |                                     |       |                |       |   |   |   |   |
| Comprehensive  loss:                                        |       |       |       |              |       |        |       |                                    |       |                                     |       |                |       |   |   |   |   |
| Foreign currency  translation adjustment                    |       | (14        | )          |              |       |        |       |                                    |       |                                     |       | (14                 | )          |   |   |   |   |
| Net loss                                                    |       | (41,480    | )          |              |       |        |       |                                    |       | (41,480                                  | )          |                |       |   |   |   |   |
| Total  comprehensive loss                                   |       | (41,494    | )          |              |       |        |       |                                    |       |                                     |       |                |       |   |   |   |   |
| Balance December  31, 2002                                  |       | $          | 13,216     |              | 13,887     |        | $          | 139                                     |       | $                                        | 59,706     |                | $          | (45,892 | ) | $ | (395 | ) | (657 | ) | $ | (342 | ) |
| Exercise of stock  options                                  |       | 366        |       | 160               |       | 2           |       | 364                                     |       |                                     |       |                |       |   |   |   |   |
| Issuance of  shares under employee stock purchase plan      |       | 214        |       | 82                |       |        |       | 214                                     |       |                                     |       |                |       |   |   |   |   |
| Sale of treasury  stock                                     |       | 53         |       |              |       |        |       | 31                                      |       |                                     |       |                |       | 10 |   | 22 |   |
| Stock issued for  acquisition of Meta Group Northern Europe |       | 700        |       | 175               |       | 2           |       | 698                                     |       |                                     |       |                |       |   |   |   |   |
| Comprehensive  loss:                                        |       |       |       |              |       |        |       |                                    |       |                                     |       |                |       |   |   |   |   |
| Foreign currency  translation adjustment                    |       | (170       | )          |              |       |        |       |                                    |       |                                     |       | (170                | )          |   |   |   |   |
| Net loss                                                    |       | (4,305     | )          |              |       |        |       |                                    |       | (4,305                                   | )          |                |       |   |   |   |   |
| Total  comprehensive loss                                   |       | (4,475     | )          |              |       |        |       |                                    |       |                                     |       |                |       |   |   |   |   |
| Balance December  31, 2003                                  |       | $          | 10,074     |              | 14,304     |        | $          | 143                                     |       | $                                        | 61,013     |                | $          | (50,197 | ) | $ | (565 | ) | (647 | ) | $ | (320 | ) |
| Exercise of stock  options                                  |       | 2,714      |       | 978               |       | 10          |       | 2,704                                   |       |                                     |       |                |       |   |   |   |   |
| Issuance of  shares under employee stock purchase plan      |       | 308        |       | 85                |       | 1           |       | 307                                     |       |                                     |       |                |       |   |   |   |   |
| Equity – based  compensation                           |       | 800        |       | 50                |       |        |       | 800                                     |       |                                     |       |                |       |   |   |   |   |
| Comprehensive  (loss) income:                               |       |       |       |              |       |        |       |                                    |       |                                     |       |                |       |   |   |   |   |
| Foreign currency  translation adjustment                    |       | 721        |       |              |       |        |       |                                    |       |                                     |       | 721                 |       |   |   |   |   |
| Net loss                                                    |       | (2,163     | )          |              |       |        |       |                                    |       | (2,163                                   | )          |                |       |   |   |   |   |
| Total  comprehensive loss                                   |       | (1,442     | )          |              |       |        |       |                                    |       |                                     |       |                |       |   |   |   |   |
| Balance December  31, 2004                                  |       | $          | 12,454     |              | $          | 15,417      |       | $                                       | 154        |                                     | $          | 64,824              |       | $ | (52,360 | ) | $ | 156 |   | (647 | ) | $ | (320 | ) |
|                                                             |            |            |            |                   |            |             |            |                                         |            |                                          |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |

 

See notes toconsolidated financial statements.

 

F-4

----

 

**METAGROUP, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Inthousands)**

** **
| ** **                                                                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                 | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                       |       |                        |       |   |   |   |   |
| Operating  activities:                                                                     |       |                        |       |   |   |   |   |
| Net loss                                                                                   |       | $                           | (2,163     | ) | $ | (4,305 | ) | $ | (41,480 | ) |
| Adjustments to  reconcile net loss to net cash (used in) provided by operating activities: |       |                        |       |   |   |   |   |
| Cumulative  effect of change in accounting principle                                       |       | —                      |       | — |   | 22,206 |   |
| Depreciation and  amortization                                                             |       | 4,745                       |       | 4,989 |   | 6,281 |   |
| Provision for  doubtful accounts                                                           |       | 108                         |       | (600 | ) | 940 |   |
| Impairment loss  on investments and advances                                               |       | 154                         |       | — |   | 1,075 |   |
| Goodwill  impairment loss                                                                  |       | —                      |       | — |   | 2,630 |   |
| Gain on sale of  affiliate investments                                                     |       | —                      |       | (615 | ) | — |   |
| Minority  interest                                                                         |       | 77                          |       | 123 |   | 33 |   |
| Equity-based  compensation and other non-cash charges                                      |       | 800                         |       | 199 |   | 267 |   |
| Deferred income  taxes                                                                     |       | —                      |       | — |   | 12,559 |   |
| Loss on sale of  subsidiary                                                                |       | 416                         |       | — |   | — |   |
| Changes in  assets and liabilities (net of acquisitions):                                  |       |                        |       |   |   |   |   |
| Accounts  receivable                                                                       |       | (1,516                      | )          | (468 | ) | 3,299 |   |
| Deferred  commissions                                                                      |       | (64                         | )          | (178 | ) | (63 | ) |
| Other current  assets                                                                      |       | (2,119                      | )          | 179 |   | (1,074 | ) |
| Other assets                                                                               |       | (333                        | )          | 173 |   | (192 | ) |
| Accounts payable                                                                           |       | (54                         | )          | (740 | ) | (165 | ) |
| Accrued expenses  and other current liabilities                                            |       | 1,353                       |       | 5,048 |   | (2,085 | ) |
| Deferred  revenues                                                                         |       | (3,907                      | )          | (1,117 | ) | (639 | ) |
|                                                                                       |       |                        |       |   |   |   |   |
| Net cash (used in)  provided by operating activities                                       |       | (2,503                      | )          | 2,688 |   | 3,592 |   |
|                                                                                       |       |                        |       |   |   |   |   |
| Investing  activities:                                                                     |       |                        |       |   |   |   |   |
| Capital  expenditures                                                                      |       | (654                        | )          | (1,021 | ) | (1,059 | ) |
| Proceeds from  sale / liquidation of investments                                           |       | —                      |       | 888 |   | 2,275 |   |
| Payments made  for acquisitions, net of cash acquired                                      |       | (781                        | )          | (2,867 | ) | (1,467 | ) |
| Disposition of  subsidiary                                                                 |       | (733                        | )          | — |   | — |   |
|                                                                                       |       |                        |       |   |   |   |   |
| Net cash used in  investing activities                                                     |       | (2,168                      | )          | (3,000 | ) | (251 | ) |
|                                                                                       |       |                        |       |   |   |   |   |
| Financing  activities:                                                                     |       |                        |       |   |   |   |   |
| Proceeds from  private placement of common stock, net of offering costs                    |       | —                      |       | — |   | 425 |   |
| Proceeds from  bank borrowings                                                             |       | 9,000                       |       | 1,000 |   | — |   |
| Repayment of  term loan                                                                    |       | —                      |       | (5,111 | ) | (2,724 | ) |
| Repayment of  line of credit                                                               |       | (9,000                      | )          | (2,049 | ) | (2,039 | ) |
| Repayment of  notes payable                                                                |       | (386                        | )          | (368 | ) | — |   |
| Payment of  capital lease obligations                                                      |       | (395                        | )          | — |   | — |   |
| Proceeds from  employee stock purchase plan                                                |       | 308                         |       | 214 |   | 156 |   |
| Proceeds from  exercise of stock options                                                   |       | 2,714                       |       | 366 |   | 2 |   |
| Proceeds from  sale of treasury stock                                                      |       | —                      |       | 53 |   | — |   |
| Increase in  restricted cash                                                               |       | —                      |       | (6,000 | ) | — |   |
|                                                                                       |       |                        |       |   |   |   |   |
| Net cash  provided by (used in) financing activities                                       |       | 2,241                       |       | (11,895 | ) | (4,180 | ) |
|                                                                                       |       |                        |       |   |   |   |   |
| Effect of  exchange rate changes on cash                                                   |       | 515                         |       | (427 | ) | 854 |   |
| Net (decrease)  increase in cash and cash equivalents                                      |       | (1,915                      | )          | (12,634 | ) | 15 |   |
| Cash and cash  equivalents at beginning of year                                            |       | 8,814                       |       | 21,448 |   | 21,433 |   |
|                                                                                       |       |                        |       |   |   |   |   |
| Cash and cash  equivalents at end of year                                                  |       | $                           | 6,899      |   | $ | 8,814 |   | $ | 21,448 |   |
| Supplemental  cash flow information:                                                       |       |                        |       |   |   |   |   |
| Cash paid during  the year for income taxes                                                |       | $                           | 203        |   | $ | 185 |   | $ | 209 |   |
| Cash paid during  the year for interest                                                    |       | $                           | 95         |   | $ | 73 |   | $ | 352 |   |

 

See notes toconsolidated financial statements.

 

F-5

----

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**1.             Nature of the Business and Summary of SignificantAccounting Policies**

 

**Natureof the Business and****Principles ofConsolidation.**** **META Group, Inc. and its subsidiaries (collectively the “Company”*)***isa leading provider of informationtechnology (“IT”) research, advisory services, and strategic consulting. The consolidated financial statementsinclude the accounts of the Company and its subsidiaries. All significantintercompany balances and transactions have been eliminated in consolidation.The results of operations for acquisitions of companies have been included inthe consolidated statements of operations commencing with the closing date ofacquisition. Operations of the Company’s international subsidiaries, other thanCanada, are consolidated on a one month lag.

 

### ***Reclassifications******.*** Certain prior year balances have been reclassified to conform to thecurrent year presentation.

 

***ForeignCurrency Translation.****** ***All assets and liabilities offoreign subsidiaries are translated into U.S. dollars at year-end exchangerates. Income and expense items are translated at average exchange ratesprevailing during the year. The resulting translation adjustments are recordedas a component of accumulated other comprehensive (loss) income in stockholders’equity.

 

***Revenueand Commission Expense Recognition.***** **Advisory Servicesrevenues are recognized on a straight-line basis over the subscription contractperiod, generally one year. All subscription contracts are billable at signing,absent special terms granted on a limited basis from time to time. As such, theCompany’s policy is to record at the time of signing of an Advisory Servicessubscription contract the fees receivable and related deferred revenues for thefull amount of the subscription contract. Accounts receivable and deferredrevenues that extend beyond a 12-month period have been classified on theconsolidated balance sheets as non-current. The Company also records therelated sales commission obligation upon the signing of the subscriptioncontract and amortizes the corresponding deferred commission expense over thesubscription period in which the related Advisory Services revenues are earnedand amortized to income. All subscription contracts are cancelable only fornon-performance, except for certain government contracts that have a 30-daycancellation clause. Historically, such cancellations have not been material.The Company records estimated reductions to revenue for customercancellations.  The Company recognizesrevenue on Strategic Consulting engagements on a contract by contract basis, asthe work is performed, utilizing the percentage ofcompletion method for fixed fee projects, or as services are rendered for timeand materials projects. Revenues from Published Research Products arerecognized at the time the applicable product is delivered. Reimbursableexpenses billed to customers are treated as revenues with offsetting costs.

 

***Supplemental Disclosures of Non-Cash Activities.***  During 2003, the Company issued 175,000shares of its Common Stock in connection with the purchase of META GroupNorthern Europe.  The value of the shares($700,000) was allocated to the assets acquired.

 

During2002, in connection with contingent consideration earned by Rubin Systems, Inc.

 

F-6

----

 

(“RSI”), the Company issued 202,499 shares of its Common Stock, to RSI.The value of the shares ($366,725) was allocated to goodwill. Additionallyduring 2002, the Company issued 267,285 options to purchase Common Stock to theshareholders of META Group AG (“META Group Germany”) in connection with thepurchase of the remaining interest of META Group Germany. The fair value of theoptions ($412,000) was allocated to goodwill.

 

***ProductDevelopment.****** ***All costs incurred in thedevelopment of new products and services are expensed as incurred.

 

***Propertyand Equipment.****** ***Property and equipment arestated at cost, net of accumulated depreciation. Depreciation is computed usingthe straight-line method over the estimated useful lives of the respectiveassets, which range from three to seven years**.**Leasehold improvements are depreciated overthe improvements’ useful lives or the lease term, which ever is shorter.

 

***ComputerSoftware Costs.*** Internal and external direct and incremental costs incurred indeveloping or obtaining computer software for internal use are capitalized inproperty and equipment and amortized under the straight-line method over theestimated useful life of the software, generally three to five years. Generaland administrative costs related to developing or obtaining such software are expensed as incurred.

 

***IncomeTaxes.****** ***Deferred income taxes areprovided for the temporary differences between the financial reporting basisand the income tax basis of the Company’s assets and liabilities as measured bythe presently enacted tax rates.**** A valuation allowance is recorded if it ismore likely than not that the Company cannot utilize its deferred tax assets.

 

***Earnings Per Share*. **Basic earnings per share is computed bydividing net income (loss) by the weighted average number of common sharesoutstanding. Diluted earnings per share is computed by dividing net income bythe weighted average number of common shares outstanding and dilutive commonequivalent shares (options and warrants to purchase Common Stock) outstanding. Common shares outstanding includes issued shares less sharesheld in treasury for the respective year.For 2004, for the purpose of calculating earnings per share – basic anddiluted, the weighted average number of shares of common stock outstanding was13,864,825. Diluted earnings per share for 2004 excludes1,317,664 common stock equivalents (options) because they are anti-dilutive.  For 2003,for the purpose of calculating earnings per share – basic and diluted, theweighted average number of shares of common stock outstanding was 13,334,225. Diluted earnings per share for 2003 excludes 1,416,134common stock equivalents (options and warrants) because they are anti-dilutive.For 2002, for the purpose of calculating earnings per share – basic anddiluted, the weighted average number of shares of common stock outstanding was13,067,155. Diluted earnings per share for 2002 excludes321,331 common stock equivalents (options and warrants) because they areanti-dilutive.

 

***Concentrationof Credit Risk.****** ***Financial instruments thatpotentially subject the Company to credit risk consist primarily of cash andtrade receivables. The Company maintains its cash with major financialinstitutions. Concentrations of credit risk with respect to accounts receivableare limited due to the wide variety of customers and markets into which theCompany’s products and services are provided, as well as their dispersionacross many different geographic areas. The Company is a party to financialinstruments with off-balance-sheet risk in 

 

F-7

----

 

the normal course of business.These financial instruments consist of irrevocable letters of credit andcorporate guarantees. (See Note 7). The Company has noother significant off-balance-sheet concentration of credit risk such asforeign exchange contracts, options contracts, or other foreign hedgingarrangements**.**

 

***FairValue of Financial Instruments.****** ***Mostof the Company’s financial instruments, including cash, trade receivables and payables,and accrued liabilities are short-term in nature. Accordingly, the carryingamount of these financial instruments approximates fair value.

 

***Long-LivedAssets.***** **The Company follows Statement of Financial Accounting Standards No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). TheCompany reviews the recoverability of its long-lived assets and finite livedintangible assets other than goodwill when events or changes in circumstancesoccur that indicate that the carrying value of the asset may not berecoverable. Evaluation of possible impairment is based on the Company’sability to recover the asset from the expected future cash flows (undiscountedand without interest charges) of the related operations. If the expectedundiscounted cash flows are less than the carrying value of such asset, animpairment loss would be recognized for the difference between estimated fairvalue and carrying value.

 

***ManagementEstimates. ***Thepreparation of financial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting periods. Actual results could differ from those estimates.

 

***IntangibleAssets.****** ***Intangible assets includegoodwill, customer lists, non-compete agreement, intellectual property andcontent databases. Goodwill represents the excess of the purchase price ofacquired businesses over the fair value of net assets acquired. In accordancewith Statement of Financial Accounting Standards No. 142 “Goodwill and OtherIntangible Assets” (“SFAS 142”), amortization of goodwill ceased on January 1,2002. The Company performs an impairment test of its recorded goodwill at leastannually, or more frequently if certain indicators arise. Of the remainingintangible assets, the non-compete agreement is being amortized on astraight-line basis over the period of the agreement (four years), the customerlists are being amortized over their estimated useful lives of 5 to 7 years,the intellectual property is being amortized over a period of 5 years, and thedatabases are being amortized over a period of 7 years.

 

***Stock-Based Compensation.***  The Company follows the disclosure-onlyprovisions of Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation” (“SFAS 123”). SFAS 123 encourages, but does notrequire, companies to adopt a fair value based method for determining expenserelated to stock-based compensation. The Company continues to account for stockbased compensation for employees using the intrinsic value method as prescribedby Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations.

 

F-8

----

 

The following tableillustrates the effect on net loss and net loss per share if the Company hadapplied the fair value recognition provisions of SFAS 123 to stock-basedemployee compensation for the years ended December 31, 2004, 2003 and 2002,respectively (in thousands, except per share data):

 
| ** **                                                                                                                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                                         |       |     |       |     |       |     |       |
| Reported net  loss                                                                                                           |       | $        | (2,163     | )        | $          | (4,305   | )          | $ | (41,480 | ) |
| Add: Stock-based  employee compensation expense included in reported net income, net of tax                                  |       | 800      |       | —   |       | 39       |       |
|                                                                                                                         |       |     |       |     |       |     |       |
| Less: Total  stock based employee compensation expense determined under fair value based  methods for all awards, net of tax |       | (1,760   | )          | (2,513   | )          | (2,451   | )          |
|                                                                                                                         |       |     |       |     |       |     |       |
| Pro forma net  loss                                                                                                          |       | $        | (3,123     | )        | $          | (6,818   | )          | $ | (43,892 | ) |
|                                                                                                                         |       |     |       |     |       |     |       |
| Net loss per  share                                                                                                          |       |     |       |     |       |     |       |
| Reported – Basic  and Diluted                                                                                           |       | $        | (0.16      | )        | $          | (0.32    | )          | $ | (3.17 | ) |
|                                                                                                                         |       |     |       |     |       |     |       |
| Pro forma –  Basic and Diluted                                                                                          |       | $        | (0.23      | )        | $          | (0.51    | )          | $ | (3.36 | ) |

 

The estimated fair valueof options granted during the years ended December 31, 2004, 2003 and 2002 was$3.55, $3.10 and $1.70 per share, respectively. The fair value of options grantedunder the Company’s fixed stock option plans during the years ended December31, 2004, 2003 and 2002 was estimated on the dates of grant using theBlack-Scholes option-pricing model with the following weighted-averageassumptions used:

 
| ** **                               | ** ** | **2004**       | ** ** | **2003**       | ** ** | **2002**       | ** ** |
|------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|
| Expected life  from vest date (in years) |       | 1.6 – 5.4 |       | 1.6 – 5.4 |       | 1.6 – 5.4 |       |
| Risk-free  interest rates                |       | 0.4 – 3.8 | %          | 0.9 – 4.1 | %          | 0.9 – 4.3 | %          |
| Volatility                               |       | 91 – 103  | %          | 87 – 117  | %          | 91 – 126  | %          |
| Dividend yield                           |       | —         |       | —         |       | —         |       |

 

Pro forma compensationcost related to shares purchased under the Second Amended and Restated 1995Employee Stock Purchase Plan (the “Purchase Plan”) is measured based on thediscount from market value.

 

Pro forma compensationexpense reflected for prior periods is not indicative of future compensationexpense that would be recorded by the Company if it adopted the fair valuebased recognition provisions of SFAS 123. Future pro forma expense may varybased upon factors such as the number of awards granted by the Company and thethen-current fair market value of such awards.

 

Detailed information foractivity in the Company’s stock plans and the assumptions used in the fairvalue based method depicted above can be found in Note 9.

 

F-9

----

 

**Recently Issued AccountingPronouncements**

 

In December 2004, theFASB issued Statement of Financial Accounting Standards No. 123 (revised 2004),“Share-Based Payment” (“SFAS 123R”). This Statement is a revision of Statement of Financial AccountingStandards No. 123, “Accounting for Stock-Based Compensation”, and supercedesAPB Opinion no. 25, “Accounting for Stock Issued to Employees”, and its relatedimplementation guidance.  SFAS 123Rrequires expensing the fair value of stock options granted to employees.  These costs were previously permitted to bedisclosed on a pro-forma basis only in the footnotes to the financialstatements.  The effective date forimplementing the provisions of SFAS 123R is for all interim or annual reportingperiods that begin after June 15, 2005. The Company will adopt SFAS 123R on July 1, 2005, and depending uponfuture stock option grants, it may have a materialimpact on its financial statements.

 

In May 2003, the FASBissued Statement of Financial Accounting Standards No.150, “Accounting forCertain Financial Instruments with Characteristics of Both Liabilities andEquity” (“SFAS 150”).  SFAS 150 changesthe accounting for certain financial instruments that under previous guidanceissuers could account for as equity.  Itrequires that those instruments be classified as liabilities on a company’sbalance sheets.  The guidance in SFAS 150is generally effective for all financial instruments entered into or modifiedafter May 31, 2003, and otherwise is effective on July 1, 2003.  The Company adopted SFAS 150 on July 1, 2003,with no impact on its financial statements.

 

In January 2003, the FASB issued FASB InterpretationNo. 46, “Consolidation of Variable Interest Entities”**(“FIN 46”) as amended by FIN 46R, (an interpretation of ARBNo. 51). FIN 46 clarifies the application of Accounting Research Bulletin No.51, “Consolidated Financial Statements”, to certain entities in which equityinvestors do not have the characteristics of a controlling financial interestor do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties.  The Company currently does nothave any interest in any unconsolidated entity for which variable interestentity accounting is required; therefore FIN 46 did not impact the Company’sconsolidated financial statements.

 

F-10

----

 

**2.             Acquisitions**

 

***2004Acquisitions***

 

*Acquisitionof META Group Middle East*

 

In April 2004, the Companyacquired 100% of META Group Middle East for $950,000 in cash.  The Company acquired this distributor inorder to have full ownership control in the Middle East (other than Israel) tobetter serve its customers in the region. The purchase price has been allocated to the assets acquired and theliabilities assumed, based on estimated fair values at the date of acquisition.The preliminary allocation resulted in goodwill of $1.1 million recorded in theAdvisory Services segment and $0.5 million recorded in the Consulting segmentand $0.4 million related to the customer list of the seller, which is beingamortized on the straight line method over 7 years.

 

***2003Acquisitions***

 

During 2003, the Company consummated threeacquisitions of former distributors in Italy, the United Kingdom, and NorthernEurope. The Company acquired these distributors in order to have full ownershipcontrol of all operations in Europe, in order to better serve its customers inthe region.  A description of these transactionsfollows:

 

*Acquisitionof META Group Italy*

 

In June 2003, the Company acquired 100% of META Group Italia S.R.L. (“METAGroup Italy”) for $280,000 in cash. The purchase price has been allocated tothe assets acquired and the liabilities assumed, based on estimated fair valuesat the date of acquisition. The allocation resulted in goodwill of $203,000recorded in the Advisory Services segment, $60,000 recorded in the Consultingsegment and $300,000 related to the customer list of the seller, which is beingamortized over 7 years.

 

* Acquisition of META Group UK*

 

In August 2003, the Company acquired 100% of META Group UK HoldingsLimited (“META Group UK”) for $1.6 million in cash. The purchase price has beenallocated to the assets acquired and the liabilities assumed, based onestimated fair values at the date of acquisition. The allocation resulted ingoodwill of $256,000 recorded in the Advisory Services segment, $140,000recorded in the Consulting segment and $1.3 million related to the customerlist of the seller, which is being amortized over 7 years.

 

* Acquisition of META Group Northern Europe*

 

In September 2003, the Company acquired 100% of META Group Norway A/S,META Group Sweden AB, META Group Finland OY, META Group Denmark A/S, META GroupBelgium SA and META Group Nederland BV (collectively “Northern Europe”). Thepurchase price consisted of $3.6 million in cash and 175,000 shares of theCompany’s common stock (valued at $700,000), as well as forgiveness of $2.6million in promissory notes and $1.5 million in trade receivables owed to theCompany by the Northern European entities. The purchase price has beenallocated to the assets acquired and the liabilities assumed, based onestimated fair values at the date of acquisition.  The allocation resulted in goodwill ofapproximately $4.5 million recorded in the Advisory Services 

 

F-11

----

 

segment, $440,000 recorded in the Consulting segment and $3.9 million related tothe customer lists of the sellers, which are being amortized over 7 years.

 

**3.             Property and Equipment**

 

Property and equipment consists of the following (inthousands):

 
| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|------------------|------------|
| ** **                                     | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                                           |       |             |       |   |   |
| Leasehold  improvements                        |       | $                | 1,760      |   | $ | 1,734 |   |
| Computer  equipment, software, and peripherals |       | 20,355           |       | 21,124 |   |
| Web site development  costs                    |       | 2,865            |       | 2,865 |   |
| Furniture and  fixtures                        |       | 4,070            |       | 1,567 |   |
|                                           |       | 29,050           |       | 27,290 |   |
| Less:  accumulated depreciation                |       | (24,470          | )          | (21,898 | ) |
|                                           |       | $                | 4,580      |   | $ | 5,392 |   |

 

Depreciation expense was$2.6 million, $3.5 million and $5.1 million for 2004, 2003 and 2002,respectively.

 

**4.             Goodwill and Intangible Assets**

 

Effective January 1,2002, the Company adopted Statement of Financial Accounting StandardsNo. 142, “Goodwill and Other Intangible Assets”**(“SFAS 142”). Under SFAS 142, goodwill and intangible assetsdeemed to have indefinite lives will no longer be amortized but will be subjectto impairment tests on an annual basis, or more frequently if certainindicators arise. Other finite lived intangible assets will continue to beamortized over their useful lives.

 

The goodwill impairmenttest is a two-step process that requires goodwill to be allocated to thereporting units. In the first step, the fair value of the reporting unit iscompared to the carrying value of the reporting unit. If the fair value of thereporting unit is less than the carrying value of the reporting unit, goodwillimpairment may exist, and the second step of the test is performed. In thesecond step, the fair value of the goodwill is compared to the carrying valueof the goodwill and an impairment loss will be recognized to the extent thatthe carrying value of the goodwill exceeds the implied fair value of thegoodwill.

 

The Company completed thesecond step of the impairment test as of September 30, 2002. As a result ofoperating losses in recent history of the Company’s Strategic Consulting andPublished Research Products segments and the overall decline in IT spendingthat began in the second half of 2000 and continued through 2002, the Companydetermined that the goodwill related to the Strategic Consulting and PublishedResearch Products segments was impaired. The respective fair values of thesegments were determined based on a review of various valuation methods such asthe discounted cash flow methodology, the guideline company methodology and themerger and acquisition methodology. Accordingly, the Company recorded animpairment charge of $22.2 million

 

F-12

----

 

relating to the carrying valueof the goodwill of these reporting units as of January 1, 2002. The impairmentcharge was recorded as the cumulative effect of a change in accountingprinciple and recorded retroactive to January 1, 2002.

 

In accordance with SFAS 142, the Company has selected a date by whichthe annual impairment test will be performed, such date being September 30. Asof September 30, 2002 it was determined that goodwill resulting from theacquisition of an additional interest in META Group AG (“META Group Germany”),and contingent consideration earned by Rubin Systems Inc. and the Verity Group,was impaired as it related to the Strategic Consulting and Published ResearchProducts segments. Accordingly, the Company recorded a $2.6 million chargewhich was recorded as an impairment loss and included as an element ofoperating expenses. The Company performed its annual impairment tests inSeptember 2003 and September 2004 which resulted in no goodwill impairment.

 

A summary of the Company’s intangible assets as of December 31, 2004and 2003 is as follows (amounts in thousands):

 
| ** **                             | ** ** | **December 31, 2004**       | ** ** |
|----------------------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Total** | ** ** |
| Amortized intangible assets:           |       |                        |       |   |   |   |   |
| Customer lists                         |       | $                           | 11,822     |   | $ | (4,387 | ) | $ | 7,435 |   |
| Intellectual property                  |       | 784                         |       | (601 | ) | 183 |   |
| Non-compete agreement                  |       | 375                         |       | (375 | ) | — |   |
| Content databases & other          |       | 2,108                       |       | (1,193 | ) | 915 |   |
| Total                                  |       | $                           | 15,089     |   | $ | (6,556 | ) | $ | 8,533 |   |
|                                   |       |                        |       |   |   |   |   |
| Unamortized intangible assets:         |       |                        |       |   |   |   |   |
| Goodwill                               |       |                        |       |   |   | $ | 16,688 |   |
|                                   |       |                        |       |   |   |   |   |
| Aggregate amortization expense:        |       |                        |       |   |   |   |   |
| Twelve months ended December 31, 2004: |       |                        |       |   |   | $ | 2,100 |   |

 
| ** **                             | ** ** | **December  31, 2003**      | ** ** |
|----------------------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Total** | ** ** |
| Amortized intangible assets:           |       |                        |       |   |   |   |   |
| Customer lists                         |       | $                           | 10,124     |   | $ | (2,715 | ) | $ | 7,408 |   |
| Intellectual property                  |       | 648                         |       | (334 | ) | 314 |   |
| Non-compete agreement                  |       | 375                         |       | (298 | ) | 77 |   |
| Content databases & other          |       | 2,085                       |       | (902 | ) | 1,183 |   |
| Total                                  |       | $                           | 13,232     |   | $ | (4,250 | ) | $ | 8,982 |   |
|                                   |       |                        |       |   |   |   |   |
| Unamortized intangible assets:         |       |                        |       |   |   |   |   |
| Goodwill                               |       |                        |       |   |   | $ | 13,016 |   |
|                                   |       |                        |       |   |   |   |   |
| Aggregate amortization expense:        |       |                        |       |   |   |   |   |
| Twelve months ended December 31, 2003: |       |                        |       |   |   | $ | 1,481 |   |

 

F-13

----

 

As of December 31, 2004, the estimatedamortization expense the Company will incur by year is as follows (inthousands):

 
| Estimated amortization expense: |   |   |   |
|---------------------------------|--------|--------|--------|
| Year ending December 31, 2005   |   | $      | 2,305  |   |
| Year ending December 31, 2006   |   | 1,671  |   |
| Year ending December 31, 2007   |   | 1,553  |   |
| Year ending December 31, 2008   |   | 1,327  |   |
| Year ending December 31, 2009   |   | 957    |   |
| Thereafter                      |   | 720    |   |
| Total                           |   | $      | 8,533  |   |

 

The changes in the carrying amount of goodwill by reportable segmentfor years ended December 31, 2003 and 2004 is as follows (in thousands):

 
| ** **                      | ** ** | **Advisory Services** | ** ** | **Strategic  Consulting** | ** ** | **Total** | ** ** |
|---------------------------------|------------|-----------------------|------------|---------------------------|------------|-----------|------------|
| Balance as of January 1, 2003   |       | $                     | 7,483      |                      | $          | —    |       | $ | 7,483 |   |
| Translation adjustments         |       | 984                   |       | —                    |       | 984       |       |
| Goodwill acquired               |       | 4,076                 |       | 473                       |       | 4,549     |       |
| Balance as of December 31, 2003 |       | 12,543                |       | 473                       |       | 13,016    |       |
| Translation adjustments         |       | 934                   |       | 66                        |       | 1,000     |       |
| Goodwill acquired               |       | 2,020                 |       | 652                       |       | 2,672     |       |
| Balance as of December 31, 2004 |       | $                     | 15,497     |                      | $          | 1,191     |       | $ | 16,688 |   |

 

**5.****             Investmentsand Advances**

 

At December 31, 2004 and 2003, the Company hadinvestments in and advances to companies in parallel or synergistic industries.Such investments and advances are summarized below (in thousands):

 

F-14

----

 
| ** ** | ** ** | **December 31,** | ** ** |
|------------|------------|------------------|------------|
| ** ** | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Tescom     |       | 933              |       | 1,070 |   |
| Other      |       | 76               |       | 76 |   |
|       |       | $                | 1,009      |   | $ | 1,146 |   |
|            |            |                  |            |  |  |  |  |

 

The Company follows a practice of reviewingits individual investments for impairment on a quarterly basis. The Companyreviews the business operations of each company in which it has an investment,its historical financial results, its projected cash flow, its plans for thefuture and the likelihood of achieving such plans. Based on such review, adetermination is made on a case-by-case basis as to whether an investment isdeemed to be permanently impaired and therefore requires an adjustment to thecarrying value.

 

The shares the Company owns in Tescom becamea marketable security on February 24, 2004 as a result of an initial publicoffering that Tescom completed. The Company classifies its investment asavailable-for-sale. During 2004, the Company determined that Tescom stock hadbeen trading at a price below the Company’s basis in the stock for a periodwhich exceeded six months, and that an other-than-temporary decline in valuehad taken place, and the Company recorded an impairment loss based on thedifference between its basis in its investment in Tescom and the market valueof Tescom stock on December 31, 2004. Accordingly, this resulted in animpairment loss of $154,000 which was recorded by the Company as of December31, 2004.

 

In 2003, the Company received proceeds of$588,000 on the liquidation of Spikes Cavell and recognized a gain of $315,000.Additionally, the Company sold another of its investments to a third party fortotal proceeds of $300,000 and recognized a gain on the sale of $300,000.There were no impairment losses on investments and advances recorded in 2003.

 

The Company will continue to evaluate its investments for impairmentevery quarter, and based on its review, may record additional impairment lossesshould the facts and circumstances in existence at that time merit such anadjustment.

 

**6.****             Bankand Other Debt**

 

In March 2003, theCompany executed a new $6 million revolving credit agreement (the “AmendedFacility”). Under the Amended Facility, interest on any outstanding borrowingswill be payable at the rate of LIBOR, as determined by the bank, plus 1.5%, orthe higher of the Prime Rate or the Federal Funds Rate plus 0.5%. The AmendedFacility is fully collateralized by a $6 million cash deposit reflected asrestricted cash as of December 31, 2004 and December 31, 2003. The AmendedFacility contains no financial covenants, and matured in November 2004. TheCompany executed a five-month extension of its Amended Facility effective as ofNovember 4, 2004, which will extend the maturity date to April 4, 2005. TheCompany reclassified its restricted cash deposit to current assets inconnection with the short term facility extension. As of December 31, 2004 andDecember 31, 2003, there was $1,533,000 and $836,000, respectively, used underthe Amended Facility in the form of standby letters of credit issued on behalfof one of the Company’s independent

 

F-15

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sales representativeorganizations and as collateral for a portion of the Company’s U.S. premisesleases and equipment leases. There were no borrowings outstanding as ofDecember 31, 2004 and December 31, 2003.

 

The Company leases variouscomputer and other equipment under non-cancelable capital leases which expirein 2006.

 

Future lease payments undercapital leases are as follows (in thousands):

 

| **Year ending December 31,**       | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|
|                               |       |       |       |
| 2005                               |       | $          | 453        |   |
| 2006                               |       | 225        |       |
|                               |       | 678        |       |
| Less: amount representing interest |       | (25        | )          |
| Less: current portion              |       | (431       | )          |
|                               |       | $          | 222        |   |

 

Interest rates on these capitalleases are at 4.75% per annum.

 

**7.****             Commitments,Contingencies and Guarantees**

 

*Lease Commitments*:           TheCompany leases office facilities and equipment under non-cancelable operatingleases. Future minimum lease payments relative to these agreements that haveinitial or remaining noncancelable terms in excess of one year are as follows(in thousands):

 

| **Year ending December 31,** | ** ** | ** ** | ** ** |
|------------------------------|------------|------------|------------|
|                         |       |       |       |
| 2005                         |       | $          | 6,436      |   |
| 2006                         |       | 5,566      |       |
| 2007                         |       | 5,577      |       |
| 2008                         |       | 2,515      |       |
| 2009                         |       | 1,439      |       |
| Thereafter                   |       | 1,860      |       |
|                         |       | $          | 23,393     |   |

 

Totalrent expense was $5.3 million, $5.9 million and $6.7 million for 2004, 2003 and2002, respectively. Included in rent expense for 2003 and 2002 were charges of$1.0 million and $2.2 million, respectively, for vacated space and losses onsubleases at certain of the Company’s domestic and German facilities. The fairvalue of the losses was computed based on the aggregate remaining leaseobligations of the vacant space reduced by estimated sublease rentals that theCompany reasonably expects to obtain for the space.

 

*Contingencies*:

 

*EarnoutProvision Related to Acquisition of Assets of Rubin Systems, Inc. (“RSI”)*

 

The Company’s purchaseagreement for the October 2000 acquisition of the assets of RSI includedcertain earnout provisions. In the event certain financial targets were met,additional contingent consideration of $2.7 million payable in cash and $1.4million payable in the Company’s common stock could have been paid throughMarch 2007. In the event the aggregate number of shares issued in satisfactionof contingent consideration exceeded 147,027, the remaining consideration couldhave been payable in cash. RSI was wholly owned by Dr. Howard Rubin, anemployee of the Company. No payment was required for the year ended December31, 2003.

 

F-16

----

 

In August2004, the Company and Dr. Rubin entered into an Amended and RestatedEmployment, Compensation and Release Agreement (the “Restated Agreement”). Theterm of the Restated Agreement is through December 31, 2008, but is subject toearlier termination. The Restated Agreement supersedes the above-referencedearnout provisions, and provides, effective as of January 1, 2004, for thefollowing earnout arrangements:

 

•        Dr. Rubin’searnout potential for the term of the Restated Agreement is $2,300,000, splitinto equal $460,000 annual increments for the years 2004 through 2008. Of the$460,000, Dr. Rubin can earn up to $230,000 per year based on Companyperformance or other criteria established by the Company’s CompensationCommittee, and he can earn up to another $230,000 based on a percentage of theCompany’s World Wide Benchmark (“WWB”) benchmark, publication and guruconsulting revenue (“WWB Revenue”). The amount earned is a percentage of theWWB Revenue is equal to ten percent, eight percent, seven percent, five percentand four percent in each of fiscal years 2004, 2005, 2006, 2007 and 2008,respectively, capped at $230,000 per year. No carryover is permitted.

 

•        Dr. Rubin isnot eligible for any earnout payments for a given fiscal year if his retainerconsulting revenue for the year is less than $1 million.

 

***MergerRelated Fees***

 

The Companyhas accrued $1,837,000 of fees and expenses payable related to the Merger withGartner, Inc. as of December 31, 2004. An additional $1,811,000 of fees will be payable upon the successfulcompletion of the Merger.

 

The Companyalso recorded $5,469,000 of fees and expenses payable to a third party for atermination of Merger during December 2004, of which $3,800,000 was paid to thethird party directly by Gartner, Inc.

 

The remainingbalance payable of $1,669,000 is recorded as a current liability of theCompany, and as an other current asset, as Gartner, Inc. is expected to paythis amount to the Company.

 

*Legal*

 

Other than ordinaryroutine litigation incidental to the Company’s business, the Company is not aparty, nor is any of its property subject to, any pending legal proceedings.

 

*Standby**Letters of Credit:*

 

See Note 6 for discussion of standby lettersof credit.

*Guarantees:*

 

In September 2000, the Company provided a guarantee in the amount of€62,000 (approximately $85,000) guaranteeing lease payments to the landlord ofone of the Company’s former independent sales representative organizations. InJanuary 2002, the landlord called the guarantee. The claim is currently beingnegotiated with the landlord. The Company is uncertain as to when this issuewill be resolved.

 

F-17

----

 

**8.****             IncomeTaxes**

 

The components of the Company’s income (loss) before provision(benefit) for income taxes, minority interest and cumulative effect of changein accounting principle is as follows (in thousands):

 
| ** **    | ** ** | **Year Ended December 31,** | ** ** |
|---------------|------------|-----------------------------|------------|
| ** **    | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| United States |       | $                           | 2,035      |   | $ | 3,598 |   | $ | (4,257 | ) |
| Foreign       |       | (3,701                      | )          | (7,607 | ) | (1,888 | ) |
| Total         |       | $                           | (1,666     | ) | $ | (4,009 | ) | $ | (6,145 | ) |

 

The provision forincome taxes is as follows (in thousands):

 
| ** ** | ** **             | **Year Ended December 31,** | ** ** |
|------------|------------------------|-----------------------------|------------|
| ** ** | ** **             | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Current    | – federal         |                        | $          | 23 |   | $ | 64 |   | $ | 8 |   |
|       | – state and other |                        | (136       | ) | 43 |   | 463 |   |
|       | – foreign         |                        | 533        |   | 66 |   | 52 |   |
|       |                   | 420                         |       | 173 |   | 523 |   |
|       |                   |                        |       |   |   |   |   |
| Deferred   | – federal         |                        | —     |   | — |   | 10,371 |   |
|       | – state           |                        | —     |   | — |   | 1,814 |   |
|       | – foreign         |                        | —     |   | — |   | 388 |   |
|       |                   | —                      |       | — |   | 12,573 |   |
|       |                   | $                           | 420        |   | $ | 173 |   | $ | 13,096 |   |

 

During 2002 the Company recorded a valuationallowance of $12.2 million on deferred tax assets existing at January 1, 2002.Such amount is reflected in deferred taxes above.

 

A reconciliation of the income tax provision(benefit) from the amount computed using the federal statutory rate is asfollows (in thousands):

 
| ** **                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Income tax benefit at statutory rate           |       | $                           | (583       | ) | $ | (1,403 | ) | $ | (2,151 | ) |
| State and other taxes, net of federal  benefit |       | (35                         | )          | 168 |   | 252 |   |
| Foreign taxes                                  |       | (166                        | )          | 77 |   | 93 |   |
| Foreign withholding taxes                      |       | 298                         |       | — |   | — |   |
| Meals and entertainment                        |       | 201                         |       | — |   | — |   |
| Impact of valuation allowance                  |       | 732                         |       | 1,221 |   | 14,440 |   |
| Other                                          |       | (27                         | )          | 110 |   | 462 |   |
|                                           |       | $                           | 420        |   | $ | 173 |   | $ | 13,096 |   |

 

F-18

----

 

The principal components of the Company’sdeferred tax assets and liabilities are as follows (in thousands):

 
| ** **                       | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|------------------|------------|
| ** **                       | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Deferred tax assets:             |       |             |       |   |   |
| Depreciation and amortization    |       | $                | 278        |   | $ | 142 |   |
| Unrealized losses on securities  |       | 4,258            |       | 3,576 |   |
| Allowance for doubtful accounts  |       | 785              |       | 793 |   |
| Accrued expenses                 |       | 1,149            |       | 1,669 |   |
| Net operating loss carryforwards |       | 13,309           |       | 11,072 |   |
| Deferred revenues                |       | 386              |       | 233 |   |
| Capital loss carryforward        |       | 2,170            |       | — |   |
| Other                            |       | 1,149            |       | 3,822 |   |
| Deferred tax asset               |       | 23,484           |       | 21,307 |   |
| Valuation allowance              |       | (23,347          | )          | (21,307 | ) |
|                             |       | 137              |       | — |   |
| Deferred tax liabilities:        |       |             |       |   |   |
| Intangible assets                |       | 1,244            |       | — |   |
| Total                            |       | $                | 1,107      |   | $ | — |   |

 

The netdeferred tax liability balance of $1.1 million is classified in othernon-current liabilities in the consolidated balance sheet.

 

During 2004, the Company increased thevaluation allowance by $2.0 million which relates to U.S. and foreign netoperating losses and deferred tax assets. The Company continues to believe thata full valuation allowance against its deferred tax assets is warranted in lightof cumulative losses over the Company’s recent history. Should circumstanceschange in the future, an adjustment to the Company’s valuation could change.

 

At December 31, 2004, the Company has netoperating loss carryforwards for federal income tax purposes of $18.6 millionexpiring as follows:

 

| **Year Expiring** | ** ** | **Amount (In thousands)** | ** ** |
|-------------------|------------|---------------------------|------------|
| 2020              |       | $                         | 2,249      |   |
| 2021              |       | 12,171                    |       |
| 2022              |       | 4,203                     |       |
| Total             |       | $                         | 18,623     |   |

 

Additionally,the Company has foreign net operating loss carryforwards of approximately $18.2million; $12.5 million of which have no expiration period and the remainder of$5.7 million expiring in 2006 through 2014.

 

The exercise of non-qualified stock optionsand the disqualifying dispositions of incentive stock options under the Company’sstock option plans gives rise to compensation which is includable in thetaxable income of the recipients and deductible by the Company for federal andstate income tax purposes. The tax deduction generated in 2004 amounted toapproximately $3.3 million and will be included in paid-in capital whenutilized. There were no benefits recognized during 2002 or 2003.

 

F-19

----

 

**9.****             Stockholders’Equity**

 

## *Private Placements ofCommon Stock*

## * *

In September 2002 five trusts affiliated withthe Company’s former President and Chief Executive Officer, Alfred J. Amoroso,purchased 125,000 shares of the Company’s common stock. Additionally, twomembers of the Company’s Board of Directors, Michael Simmons and Gayl W.Doster, purchased 20,000 and 10,000 shares of the Company’s common stock,respectively. All of the shares were purchased from META Group Germany fortotal proceeds of approximately $425,000.

 

*Common Stock Issued for Purchase of METAGroup Northern Europe*

 

InSeptember 2003, the Company acquired 100% of META Group Norway A/S, META GroupSweden AB, META Group Finland OY, META Group Denmark A/S, META Belgium SA andMETA Nederland BV (collectively “Northern Europe”). As part of the purchaseconsideration, the Company issued 175,000 shares of its common stock valued at$700,000.

 

*Treasury Stock Sale*

 

In November 2003, META Germany sold 10,000shares of the Company’s common stock held as treasury stock to a third partyfor proceeds of $53,000.

 

*Stock Option Plans*

 

The Company’s 2004 Stock Plan, 2004 Non-Employee Director Stock OptionPlan, Amended and Restated 1995 Non-Employee Director Stock Option Plan, SecondAmended and Restated 1995 Stock Plan, 1993 Stock Option and Incentive Plan,Restated and Amended 1989 Stock Option Plan, and Amended and Restated 1996Equity Compensation Plan of The Sentry Group, Inc. (the “Plans”) provide forgrants to employees, directors, and consultants of incentive stock options (“ISOs”)and non-qualified stock options (“NQSOs”), for the purchase of up to 600,000, 225,000,350,000, 6,375,000, 2,400,000, 5,400,000, and 359,500 shares of common stock,respectively. In addition to the 600,000 shares initially reserved for issuanceunder the 2004 Stock Plan, the following shares are also reserved for issuanceunder the 2004 Stock Plan: (1) an additional 600,000 shares (or such lessernumber as is determined by the Company’s Board) on the first day of each of theCompany’s fiscal years 2005, 2006, 2007 and 2008 (for a maximum aggregatenumber of shares in those four years of 2,400,000) and (2) up to an additional1,500,000 shares that (a) remain available for issuance under the Company’sSecond Amended and Restated 1995 Stock Plan upon termination of the SecondAmended and Restated 1995 Stock Plan, and (b) are subject to options and otherawards granted under the Company’s Second Amended and Restated 1995 Stock Planupon cancellation or expiration of such options and other awards, where suchcancellations or expirations occur after termination of the Second Amended andRestated 1995 Stock Plan.

 

F-20

----

 

All optionsgranted under the Plans are at an exercise price of not less than fair marketvalue. The Compensation Committee of the Board of Directors determined thedates at which options vest and become exercisable. Upon adoption of the SecondAmended and Restated 1995 Stock Plan, the 1993 Stock Option and Incentive Planand the Restated and Amended 1989 Stock Option Plan were terminated, except asto outstanding stock options. Upon adoption of the 2004 Non-Employee DirectorStock Option Plan, the Company immediately ceased making grants under theAmended and Restated 1995 Non-Employee Director Stock Option Plan.

 

Stock option activity under the Plans from January 1, 2002 to December31, 2004 was as follows:

 

F-21

----

 

| ** **                    | ** ** | **Options** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
|-------------------------------|------------|-------------|------------|--------------------------------------|------------|
|                          |       |        |       |                                 |       |
| Outstanding January 1, 2002   |       | 3,569,866   |       | $                                    | 9.26       |   |
|                          |       |        |       |                                 |       |
| Granted                       |       | 2,252,771   |       | $                                    | 2.18       |   |
| Exercised                     |       | (1,001      | )          | $                                    | 2.17       |   |
| Canceled                      |       | (656,899    | )          | $                                    | 8.06       |   |
| Outstanding December 31, 2002 |       | 5,164,737   |       | $                                    | 6.32       |   |
|                          |       |        |       |                                 |       |
| Granted                       |       | 589,969     |       | $                                    | 4.09       |   |
| Exercised                     |       | (160,273    | )          | $                                    | 2.28       |   |
| Canceled                      |       | (513,122    | )          | $                                    | 7.02       |   |
| Outstanding December 31, 2003 |       | 5,081,311   |       | $                                    | 6.12       |   |
|                          |       |        |       |                                 |       |
| Granted                       |       | 666,400     |       | $                                    | 5.23       |   |
| Exercised                     |       | (978,571    | )          | $                                    | 2.77       |   |
| Canceled                      |       | (923,374    | )          | $                                    | 6.54       |   |
| Outstanding December 31, 2004 |       | 3,845,766   |       | $                                    | 6.71       |   |
|                          |       |        |       |                                 |       |
| Exercisable:                  |       |        |       |                                 |       |
| December 31, 2004             |       | 2,527,628   |       | $                                    | 8.17       |   |
| December 31, 2003             |       | 2,883,557   |       | $                                    | 8.19       |   |
| December 31, 2002             |       | 2,151,203   |       | $                                    | 10.00      |   |

 

AtDecember 31, 2004, 1,387,646 shares were issuable upon the exercise ofoutstanding NQSOs, and 2,458,120 shares were issuable upon the exercise ofoutstanding ISOs.

 

The following table summarizes information about stock optionsoutstanding at December 31, 2004:

** **
| ** **                   | ** **     | **OPTIONS OUTSTANDING**                 | ** ** | **OPTIONS EXERCISABLE**                | ** ** |
|------------------------------|----------------|-----------------------------------------|------------|----------------------------------------|------------|
| **RANGE OF EXERCISE PRICES** | ** **     | **NUMBER  OUTSTANDING  AS OF 12/31/04** | ** ** | **WEIGHTED  AVERAGE  REMAINING  LIFE** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** | **NUMBER  EXERCISABLE  AS OF 12/31/04** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** |
|                         |           |                                    |       |                                   |       |   |   |            |   |   |   |
| $                            | 1.56 -$2.05    |                                    | 788,443    |                                   | 7.19       |   | $ | 2.01 |   | 446,343 |   | $ | 2.01 |   |
| 2.10 -3.44                   |           | 774,082                                 |       | 7.20                                   |       | 2.37 |   | 577,808 |   | 2.43 |   |
| 3.50 - 5.70                  |           | 771,368                                 |       | 9.03                                   |       | 4.67 |   | 123,852 |   | 4.28 |   |
| 5.77 - 9.75                  |           | 793,910                                 |       | 5.07                                   |       | 7.48 |   | 661,662 |   | 7.51 |   |
| 11.83 -  27.50               |           | 717,963                                 |       | 3.43                                   |       | 17.89 |   | 717,963 |   | 17.89 |   |
| $                            | 1.56 -  $27.50 |                                    | 3,845,766  |                                   | 6.42       |   | $ | 6.71 |   | 2,527,628 |   | $ | 8.17 |   |

 

The weighted average remaining contractual life of options outstandingat December 31, 2004, 2003, and 2002 was 6.42, 7.18, and 7.88 years,respectively.

 

## *Stock Purchase Plan*

## * *

The Purchase Plan was adopted by the Board ofDirectors and approved by the Company’s stockholders on October 2, 1995. ThePurchase Plan provides for the issuance of a maximum of 750,000 shares ofcommon stock to employees at prices equal to 85% of the lesser of the marketprice of the common stock on the first or last day of the semi-annual planperiod.

 

F-22

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During the years ended December31, 2004 and 2003, the Company issued 84,785 and 80,376 shares, respectively,under the Purchase Plan. The Company terminated the Purchase Plan as ofDecember 31, 2004 in conjunction with its proposed merger with Gartner, Inc.(See Note 15).

 

**10.****          Employee401(k) Savings Plan**

 

The Company has a tax-deferred employee401(k) savings plan covering substantially all employees. Contributions by theCompany are made at the Company’s discretion. No contributions have been madeby the Company under this plan.

 

**11.****          RelatedParty Transactions**

 

*PrivatePlacements of the Company’s Common Stock*

 

In September 2002 five trusts affiliated with the Company’s formerPresident and Chief Executive Officer, Alfred J. Amoroso, purchased 125,000shares of the Company’s common stock. Additionally, two members of the Company’sBoard of Directors, Michael Simmons and Gayl W. Doster, purchased 20,000 and10,000 shares of the Company’s common stock, respectively. All of the shareswere purchased from META Group Germany for total proceeds of approximately$425,000.

 

In June 2001 the Company completed a private placement of its commonstock whereby the Company issued 1,726,617 shares of its common stock for $2.78per share to Dale Kutnick, the Company’sChairman of the Board of Directors, former Chief Executive Officer and formerCo-Research Director, and additional purchasers affiliated with Francis J.Saldutti, Harry Gruner and George McNamee, each of whom is a member of theCompany’s Board of Directors (the “Board of Directors”). Total proceeds to the Company were $4.57million, net of offering costs of approximately $227,000. The Company filed a registration statement withthe Securities and Exchange Commission to register the shares issued (otherthan those issued to Mr. Kutnick and the purchaser affiliated with Mr.McNamee). Such registration statement was effective on January 26, 2004.

 

*Rubin Systems,Inc. (“RSI”) and Dr. Howard Rubin*

 

In October 1996, theCompany entered into an agreement (the “Original Agreement”) with RSI, a providerof IT trend tracking, finance analysis and software engineering measurementconsulting. Under the Original Agreement, RSI provided, on an exclusive basis,measurement research and analysis for use in one of the Company’s AdvisoryServices. In June 1998, the Company and RSI entered into an addendum to theOriginal Agreement whereby the Company distributed for RSI certain publishedresearch products, primarily the *Worldwide Benchmark Report*(a publication presenting facts and trend-line data concerning IT performanceand productivity, budgets and spending, emerging technologies, and businessrequirements compiled from a worldwide sample of IT organizations).

 

F-23

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In October 2000, theCompany completed the acquisition of substantially all the assets of RSI for aninitial payment of $750,000 in cash, $375,000 in common stock (36,874 shares),and the assumption of certain liabilities. During 2002, the Company paid$569,000 in cash and $369,000 in the form of 202,499 shares of the Company’scommon stock as contingent consideration in connection with the achievement ofcertain financial targets by RSI and $500,000 in additional consideration inconnection with the fair value of options to purchase the Company’s commonstock granted to Dr. Howard Rubin. During 2001 RSI earned contingent paymentsof $1.3 million, consisting of $250,000 paid in common stock (57,084 shares)and the remainder paid in cash. In the event certain financial targets are met,additional contingent consideration of $2.7 million payable in cash and $1.4million payable in the Company’s common stock may be paid through March 2007.In the event the aggregate number of shares issued in satisfaction ofcontingent consideration exceeds 147,027, the remaining consideration will bepayable in cash. RSI is wholly-owned by Dr. Howard Rubin, a director andofficer of the Company.

 

In August 2004, the Company and Dr. Rubin entered into an Amended andRestated Employment, Compensation and Release Agreement (the “RestatedAgreement”). The term of the Restated Agreement is through December 31, 2008,but is subject to earlier termination. The Restated Agreement supersedes theabove-referenced earnout provisions, and provides, effective as of January 1,2004, for the following earnout arrangements:

 

•    Dr. Rubin’searnout potential for the term of the Restated Agreement is $2,300,000, splitinto equal $460,000 annual increments for the years 2004 through 2008. Of the$460,000, Dr. Rubin can earn up to $230,000 per year based on Companyperformance or other criteria established by the Company’s CompensationCommittee, and he can earn up to another $230,000 based on a percentage of theCompany’s World Wide Benchmark (“WWB”) benchmark, publication and guruconsulting revenue (“WWB Revenue”). The amount earned is a percentage of theWWB Revenue is equal to ten percent, eight percent, seven percent, five percentand four percent in each of fiscal years 2004, 2005, 2006, 2007 and 2008,respectively, capped at $230,000 per year. No carryover is permitted.

 

•    Dr. Rubin is noteligible for any earnout payments for a given fiscal year if his retainerconsulting revenue for the year is less than $1 million.

 

Pursuant to the terms ofDr. Rubin’s employment and management agreement, as amended, the Companyremains obligated to pay a royalty to Dr. Rubin on certain products andservices sold by the Company. The Company recognized $4.1 million, $3.6million, and $2.5 million in revenues from the sale of RSI derivative productsduring the years ended December 31, 2004, 2003 and 2002, respectively. Inexchange for the content provided by Dr. Rubin and RSI, the Company incurred$1,046,000, $703,000, and $763,000 in royalty and commission expenses to Dr.Rubin and RSI during 2004, 2003 and 2002, respectively.

 

*FirstAlbany Corporation*

 

In March 1995, theCompany entered into an exclusive strategic alliance agreement with FirstAlbany Corporation (“First Albany”), a financial services firm. The agreementprovides for the distribution of the Company’s written research and analysis.This agreement is annually renewable by First Albany, subject to attainment ofspecified minimum revenue targets. The

 

F-24

----

 

Company recognized $1.2million, $1.8 million and $1.3 million in revenues from this arrangement during2004, 2003 and 2002 respectively. Accounts receivable from First Albany were $0and $493,000 as of December 31, 2004 and 2003, respectively. A former directorof the Company is also Chairman of First Albany Companies, Inc., the holdingcompany of First Albany Corporation, and the Chairman of the Company is also adirector of First Albany Companies, Inc. On February 20, 2004, First Albanygave notice to the Company that it was terminating the agreement effectiveAugust 20, 2004.

 

**12.****          Segment Reporting**

 

The Company’s chiefoperating decision-making group is comprised of the President and ChiefOperating Officer and certain other executive officers. The Company’s operatingsegments are managed separately, as each operating segment represents astrategic business unit that offers distinct products/services. In 2003, theCompany’s operating segments consisted of Advisory Services, StrategicConsulting, and Published Research Products. Advisory Services providecomprehensive coverage of virtually all relevant IT and business-related issuesfaced by its clients through client/analyst interaction and publishedconclusions and recommendations to each client’s specific IT requirements.Strategic Consulting provides custom consulting services tailored to meetindividual client requirements. Published Research Products offer varioustopic-specific reports designed to serve both as complements to the Company’score services and as standalone deliverables that meet specific assessmentrequirements.

 

In the quarter endedMarch 31, 2004, the Company completed a reorganization of the managementstructure overseeing Advisory Services and Published Research Products. Inaddition, the Company also completed a re-evaluation of its strategy aroundcontent generation and delivery as they relate to Published Research Products. Asa result, the Company has organized itself around two business segments:Advisory Services and Strategic Consulting. The Company’s operating segmentsare managed separately, because each operating segment represents a strategicbusiness unit that generally offers distinct products / services. AdvisoryServices provide comprehensive coverage of relevant information technology andbusiness-related issues faced by its clients through client/analystinteraction, published conclusions and recommendations to each client’sspecific IT requirements, including various topic-specific reports andstandalone deliverables that meet specific assessment requirements. StrategicConsulting provides custom consulting services tailored to meet individualclient requirements.

 

The accounting policiesof the operating segments are the same as those described in Note 1 except thatthe disaggregated financial results for the Company’s operating segments havebeen prepared using a management approach, which is consistent with the basisand manner in which the Company’s management internally disaggregates financialinformation for the purposes of assistance in making internal operatingdecisions. In 2003, the Company evaluated performance based on stand-alonesegment operating income, defined by the Company as the segment revenues lesssegment cost of sales and corporate selling, general and administrativeallocations. Selling, general and administrative expenses were allocatedratably based on each operating segments’ revenues. Management did not allocatecorporate assets, non-operating income, or income taxes when measuring segmentresults. In 2004, the Company changed how it evaluates performance to a measurebased on stand-alone segment gross margin, defined by the Company as thesegment revenues less segment cost of services and fulfillment excluding

 

F-25

----

 

selling, marketing, general andadministrative expenses. Those expenses were previously allocated ratably basedon each operating segments’ revenues.  In2004, the Company continued to refine the measurement of segment revenues and,as a result, reclassified $1.9 million and $0.9 million for 2004 and 2003,respectively, to Strategic Consulting from Advisory Services. Management doesnot allocate corporate assets, non-operating income or income taxes whenmeasuring segment results. The Company evaluates the results of its geographicsegments excluding intercompany royalty income and expense.

 

The Company earns revenuefrom clients in many countries. In 2004, other than the United States, and in2003, other than the United States and Germany, there was no individual countryin which revenues from external clients represent 10% or more of the Company’sconsolidated revenues. In 2002, other than the United States, there was noindividual country in which revenues from external clients represented 10% ormore of the Company’s consolidated revenues. Additionally, no single clientaccounted for 10% or more of total revenue in the years 2004, 2003 and 2002,and the loss of a single client, in management’s opinion, would not have amaterial adverse effect on revenues.

 

Information by operatingsegment is set forth below (in thousands):

 
| ** **                       | ** ** | **Advisory  Services** | ** ** | **Strategic  Consulting** | ** ** | **Unallocated** | ** ** | **Consolidated  Total** | ** ** |
|----------------------------------|------------|------------------------|------------|---------------------------|------------|-----------------|------------|-------------------------|------------|
| **Year Ended December 31, 2004** | ** ** | ** **             | ** ** | ** **                | ** ** | ** **      | ** ** | ** **              | ** ** |
| Revenues                         |       | $                      | 92,838     |                      | $          | 45,983          |       | $                       | 2,680      |   | $ | 141,501 |   |
| Gross margin                     |       | 54,278                 |       | 14,316                    |       | —          |       | 68,594                  |       |
| Depreciation & amortization  |       | (3,179                 | )          | (1,566                    | )          | —          |       | (4,745                  | )          |
| Assets                           |       | —                 |       | —                    |       | 90,813          |       | 90,813                  |       |
| ** **                       | ** ** | ** **             | ** ** | ** **                | ** ** | ** **      | ** ** | ** **              | ** ** |
| **Year Ended December 31, 2003** | ** ** | ** **             | ** ** | ** **                | ** ** | ** **      | ** ** | ** **              | ** ** |
| Revenues                         |       | $                      | 83,385     |                      | $          | 36,599          |       | $                       | 2,501      |   | $ | 122,485 |   |
| Gross margin                     |       | 46,841                 |       | 9,115                     |       | —          |       | 55,956                  |       |
| Depreciation & amortization  |       | (3,503                 | )          | (1,486                    | )          | —          |       | (4,989                  | )          |
| Assets                           |       | —                 |       | —                    |       | 86,712          |       | 86,712                  |       |
|                             |       |                   |       |                      |       |            |       |                    |       |
| **Year Ended December 31, 2002** | ** ** | ** **             | ** ** | ** **                | ** ** | ** **      | ** ** | ** **              | ** ** |
| Revenues                         |       | $                      | 82,053     |                      | $          | 32,009          |       | $                       | 2,471      |   | $ | 116,533 |   |
| Gross margin                     |       | 47,202                 |       | 7,678                     |       | —          |       | 54,880                  |       |
| Depreciation & amortization  |       | (4,522                 | )          | (1,759                    | )          | —          |       | (6,281                  | )          |
| Assets                           | * *   | *—*               | * *   | *—*                  |       | 87,677          |       | 87,677                  |       |

 

F-26

----

 

The Company sells its products in the UnitedStates, and internationally through its subsidiaries in Canada, the AsiaPacific region, the Middle East and Europe. The Company also utilizes a networkof independent sales representative organizations located in South Africa, Israel,Hungary, Japan and Argentina to distribute its products.

 

Information bygeographic region is set forth below (in thousands):

 
| ** **                       | ** ** | **Americas** | ** ** | **Asia-Pacific** | ** ** | **Europe,  Middle East,  Africa** | ** ** | **Consolidated  Total** | ** ** |
|----------------------------------|------------|--------------|------------|------------------|------------|-----------------------------------|------------|-------------------------|------------|
| **Year Ended December 31, 2004** | ** ** | ** **   | ** ** | ** **       | ** ** | ** **                        | ** ** | ** **              | ** ** |
| Revenues                         |       | $            | 90,116     |             | $          | 7,518                             |       | $                       | 43,867     |   | $ | 141,501 |   |
| Operating income (loss)          |       | (5,855       | )          | 271              |       | 3,941                             |       | (1,643                  | )          |
| Long – lived assets         |       | 6,443        |       | 2,150            |       | 21,800                            |       | 30,393                  |       |
| ** **                       | ** ** | ** **   | ** ** | ** **       | ** ** | ** **                        | ** ** | ** **              | ** ** |
| **Year Ended December 31, 2003** | ** ** | ** **   | ** ** | ** **       | ** ** | ** **                        | ** ** | ** **              | ** ** |
| Revenues                         |       | $            | 91,176     |             | $          | 5,829                             |       | $                       | 25,480     |   | $ | 122,485 |   |
| Operating income (loss)          |       | (3,189       | )          | (918             | )          | (686                              | )          | (4,793                  | )          |
| Long – lived assets         |       | 7,605        |       | 2,092            |       | 19,183                            |       | 28,880                  |       |
|                             |       |         |       |             |       |                              |       |                    |       |
| **Year Ended December 31, 2002** | ** ** | ** **   | ** ** | ** **       | ** ** | ** **                        | ** ** | ** **              | ** ** |
| Revenues                         |       | $            | 95,063     |             | $          | 4,849                             |       | $                       | 16,621     |   | $ | 116,533 |   |
| Operating income (loss)          |       | (5,983       | )          | 1,436            |       | (379                              | )          | (4,926                  | )          |
| Long – lived assets         | * *   | 12,678       |       | 1,856            |       | 9,621                             |       | 24,155                  |       |

 

F-27

----

 

**13.****          SelectedQuarterly Financial Data (Unaudited)**

 

The following table sets forth certain key interimfinancial information for the years ended December 31, 2004 and 2003.

 
| ** **                                            | ** ** | **First  Quarter**                            | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                            |       | **(In  thousands, except per share amounts)** |       |
| **2004:**                                             |       |                                          |       |                |       |               |       |                |       |
| Total revenues                                        |       | $                                             | 32,602     |                | $          | 37,180             |       | $                   | 34,395     |   | $ | 37,324 |   |
| Gross profit                                          |       | $                                             | 15,396     |                | $          | 17,513             |       | $                   | 17,678     |   | $ | 18,009 |   |
| Net income (loss)                                     |       | $                                             | (1,536     | )                   | $          | 448                |       | $                   | 1,040      |   | $ | (2,115 | ) |
| Net income (loss) per basic and diluted  common share |       | $                                             | (0.11      | )                   | $          | 0.03               |       | $                   | 0.07       |   | $ | (0.15 | ) |

 
| ** **                                            | ** ** | **First  Quarter**                            | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                            |       | **(In  thousands, except per share amounts)** |       |
| **2003:**                                             |       |                                          |       |                |       |               |       |                |       |
| Total revenues                                        |       | $                                             | 28,173     |                | $          | 30,057             |       | $                   | 29,394     |   | $ | 34,861 |   |
| Gross profit                                          |       | $                                             | 13,424     |                | $          | 13,388             |       | $                   | 12,557     |   | $ | 16,587 |   |
| Net income (loss)                                     |       | $                                             | 111        |                | $          | (1,517             | )          | $                   | (1,930     | ) | $ | (969 | ) |
| Net income (loss) per basic and diluted  common share |       | $                                             | 0.01       |                | $          | (0.11              | )          | $                   | (0.14      | ) | $ | (0.07 | ) |
|                                                  |       |                                          |       |                |       |               |       |                |       |

 

The total of quarterly earnings per share may not equal the annualamount, as earnings per share is calculated independently for each quarter.

 

**14.****          RestructuringCharges**

 

During 2004, 2003, and 2002, the Companyrecorded restructuring charges totaling $1,755,000, $1,642,000 and $362,000,respectively. These charges were associated with workforce reductions, whichtotaled 32 employees in 2004, 41 employees in 2003 and 53 employees in 2002(from both domestic and foreign locations). Each year’s reduction representedin excess of 5% of the Company’s total workforce at the time. These workforcereduction plans were initiated in order to lower costs due to the reducedlevels of IT spending by the Company’s customers. With respect to the 2004workforce reductions, $1,340,000 was unpaid as of December 31, 2004 and isexpected to be paid in 2005. With respect to the 2003 workforce reductions,$1,196,000 was unpaid as of December 31, 2003 and was paid in 2004. Theliabilities incurred in the 2002 restructuring action were paid in therespective quarters that the effected employees were notified.

 

F-28

----

 

**15.****          MergerAgreement**

 

                On December 26, 2004, META Group entered into a definitive agreement (the “Agreement”) for Gartner, Inc. (“Gartner”) to acquire META Group (the “Merger”). Under the terms of the Agreement, META Group stockholders will receive $10.00, without interest, in cash for each share of META Group common stock held by them. The Merger is expected to become effective in the second calendar quarter of 2005. The Merger is subject to regulatory review, approval by META Group stockholders and certain other customary conditions.

 

F-29

----

 

**SCHEDULEII**

 

**METAGROUP, INC.**

 

**VALUATIONAND QUALIFYING ACCOUNTS**

 

**(Inthousands)**

 

 
| ** **                      | ** ** | ** **                           | ** ** | **Additions**                                   | ** ** | ** **                                  | ** ** | ** **     | ** ** |
|---------------------------------|------------|--------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------|------------|----------------|------------|
| ** **                      | ** ** | **Balance at  Beginning of  Period** | ** ** | **Charged  (Credited) to  Costs and  Expenses** | ** ** | **Charged  (Credited) to  Other  Accounts** | ** ** | **Deductions** | ** ** | **Balance  at End  of Period** | ** ** |
| ** **                      | ** ** | ** **                           | ** ** | ** **                                      | ** ** | ** **                                  | ** ** | ** **     | ** ** | ** ** | ** ** |
| Year Ended December 31, 2004:   |       |                                 |       |                                            |       |                                        |       |           |       |   |   |   |   |   |   |
|                            |       |                                 |       |                                            |       |                                        |       |           |       |   |   |   |   |   |   |
| Allowance for doubtful accounts |       | $                                    | 1,026      |                                            | $          | 108                                         |       |           |       | $ | (69 | ) | $ | 1,065 |   |
|                            |       |                                 |       |                                            |       |                                        |       |           |       |   |   |
| Year Ended December 31, 2003:   |       |                                 |       |                                            |       |                                        |       |           |       |   |   |   |   |   |   |
|                            |       |                                 |       |                                            |       |                                        |       |           |       |   |   |   |   |   |   |
| Allowance for doubtful accounts |       | $                                    | 2,313      |                                            | $          | (600                                        | )          |           |       | $ | (687 | ) | $ | 1,026 |   |
|                            |       |                                 |       |                                            |       |                                        |       |           |       |   |   |
| Year ended December 31, 2002:   |       |                                 |       |                                            |       |                                        |       |           |       |   |   |   |   |   |   |
|                            |       |                                 |       |                                            |       |                                        |       |           |       |   |   |   |   |   |   |
| Allowance for doubtful accounts |       | $                                    | 2,446      |                                            | $          | 940                                         |       |           |       | $ | (1,073 | ) | $ | 2,313 |   |

 

S-1

----